# Tax audit: how the procedure works and what your rights are

> How a tax audit works in Croatia — from the notice of audit to the audit report, objections and appeal. Find out what your rights and deadlines are at each stage of the procedure.

Source: https://lazeta.hr/en/news/tax-audit-procedure-and-your-rights  
Category: TAX AUDIT  
Author: Ivan Lažeta, certified tax adviser

Few people are left indifferent by a notice of tax audit. Yet an audit is a procedure with clearly prescribed rules, stages and deadlines — and the taxpayer has specific rights within it. Those who know and exercise them in good time significantly influence the course and outcome of the procedure. Below we walk through the entire course of an audit under the General Tax Act.

## What a tax audit is and who conducts it

A tax audit is part of the tax relationship in which the tax authority conducts proceedings to verify and establish facts material to the taxation of taxpayers and other persons. It is conducted by tax auditors, tax inspectors and other authorised civil servants. The subject of an audit may be one or more types of tax, and in the case of companies limited by shares and partnerships the audit also covers verification of relationships material to taxation between a member and the company itself.

The tax authority selects taxpayers for audit according to their fiscal capacity and a risk assessment, with large taxpayers given priority. A taxpayer cannot influence the selection decision — but can influence everything that follows it.

## Notice of tax audit — the first step

An audit generally begins with a notice served on the taxpayer at least 8 days before the audit starts. Exceptionally, it may be served immediately before the start if earlier service would jeopardise the purpose of the audit. The notice must state the legal basis, the subject of the audit, the period under audit, the start date and the taxpayer's obligation to participate in the procedure.

Those 8 days are not much, but they are enough for what matters most: reviewing the documentation for the period under audit and engaging professional assistance. In a tax audit of legal persons and natural persons carrying on a registered activity, the authorised representative may only be a professional from among certified tax advisers or attorneys.

## The course of the audit: your rights and obligations

During the audit itself, rules apply that protect both sides. The authorised officer must identify themselves to the taxpayer and must conduct the audit with equal care as to all material facts — both those that operate to the taxpayer's detriment and those in the taxpayer's favour. The audit is directed at material facts, those capable of increasing or reducing the tax liability, and its duration is limited to what is strictly necessary.

The audit is carried out at the taxpayer's registered office during ordinary business hours, and the taxpayer must make a suitable place of work available. The authorised officer has the right to enter and inspect land and business premises — but the taxpayer or their authorised representative must be allowed to be present during the inspection.

## Closing discussion and the audit report

Before drawing up the audit report, the tax authority holds a closing discussion with the taxpayer. Disputed facts, legal assessments, conclusions and their effects on the tax liability are discussed there — it is the last opportunity to clarify positions before they enter the report. An audit report is then drawn up, issued in electronic form and delivered to the taxpayer's electronic mailbox.

## Objection to the audit report — the key deadline

The taxpayer has the right to object to the audit report, within a period that may be no shorter than 5 and no longer than 20 days. The tax authority must consider the objection and state the reasons for any rejection in the reasoning of the tax assessment. An objection lodged out of time will not be considered — which is why this is the stage where most is lost through inaction.

If the objection presents new facts and material evidence such that the established facts or legal assessments should be changed, a supplementary audit report is drawn up. No objection is permitted against a supplementary report.

## The tax assessment and the appeal

The tax assessment is issued on the basis of the facts set out in the audit report and any supplementary report, within 60 days from the expiry of the objection period or from service of the supplementary report. An appeal against the assessment is permitted within 30 days; it is addressed to the competent second-instance authority and filed with the first-instance tax authority. The procedure therefore does not end with the assessment — but the quality of argumentation from the earlier stages substantially determines the prospects in the appeal procedure.

## Tax settlement — an option before the report is served

For liabilities newly established in the audit procedure there is also the option of a tax settlement, which may be concluded up until the audit report is served. The conditions are acceptance of the newly established liability and waiver of the right to legal remedies. In return, interest is reduced in proportion to the amount paid, by between 10 and 100 per cent for the amount paid on the day the settlement is concluded, or by 50 per cent where the full amount is paid within 90 days, and a liability established by estimation may be reduced by a total of 5 per cent. A settlement cannot be concluded where the audit has established a suspicion of a criminal offence for which a criminal complaint will be filed.

## How far back an audit can reach: limitation

A tax audit may be commenced within three years from the start of the limitation period for the right to assess a tax liability, with limitation itself taking effect after six years. Exceptionally, an audit may be commenced for all periods for which limitation has not taken effect — including in cases of abuse of rights, in proceedings to establish the difference between assets acquired and proven means, in proceedings to combat tax fraud, where there is reasonable suspicion of corruption offences, and in the case of cross-border transactions and transfer pricing. An assessment issued after limitation has taken effect is unlawful, and the tax authorities are required to have regard to limitation of their own motion.

## Conclusion

A tax audit has a clear structure: notice, audit activities, closing discussion, audit report, objection, assessment, appeal. At each of these stages there are rights that can be exercised and deadlines that must not be missed — and the most can be achieved at the very start, while the facts are still being established. If you have received a notice of tax audit or the procedure is already under way, involving a certified tax adviser in good time can significantly influence its course and outcome — feel free to get in touch to discuss your situation.

*This article is informational in nature and does not constitute tax advice for any individual case.*

**Contact:** ivan@lazeta.hr · +385 92 350 8437 · Štefanovečka cesta 10, 10000 Zagreb, Croatia