Reporting an offence was considered in one in three tax audits

The Finnish Tax Administration may conduct a tax audit as a control measure to investigate whether it has been provided with correct and sufficient information for the assessment of taxes and the fulfilment of the obligation to pay taxes.

The scope of the tax audits ranges from targeted tax audits concerning a specific type of income, asset or transaction to more extensive audits concerning an individual industry, for example. In conjunction with a tax audit, tax auditors may also collect comparison data on other taxpayers. The Tax Administration uses this comparison data when assessing the validity of the taxation of taxpayers who are not the subject of the audit in question.

Tax audits are provided for in the Finnish Act on Assessment Procedure and the Finnish Act on the Taxation Procedure for Self-assessed Taxes as well as the decrees adopted based on these Acts. In addition, the Tax Administration’s guidelines on good tax auditing practice are followed in tax audits.

Extensive reporting obligation and obligation to present documents are part of a tax audit

Taxpayers have an extensive reporting obligation and obligation to present documents for the purposes of a tax audit. Pursuant to the Act on Assessment Procedure and the Act on the Taxation Procedure for Self-assessed Taxes, the taxpayer must during the tax audit present for inspection all documents and property that may be necessary for the tax assessment or the examination of an appeal against the tax assessment. Evaluating the necessity of the documents requested is left exclusively to the discretion of the tax auditors.

In the course of a tax audit, information may also be obtained from third parties, i.e. from other parties than the taxpayer. The third parties’ reporting obligation is also extensive and based on the premise that each person must provide information necessary for the taxation of another taxpayer if requested by the Tax Administration. The information requested may relate to a matter concerning which the third party has the right to refuse to testify by law. The information must nevertheless be provided if it impacts taxation and is relevant to the taxpayer’s financial position.

The administrative procedure therefore presumes very open communication to the authority. However, the proper fulfilment of the reporting obligation and the possibility of criminal liability pose challenges to the taxpayer’s protection under the law.

The possibility of criminal proceedings should be considered at an early stage

According to the Tax Administration, reporting an offence was considered in one in three tax audits last year and nearly 2,400 economic crime cases were reported to the police. The number is up by approximately 15% from the previous year and higher than ever before. More than half of all economic crime cases recorded by the police were tax and accounting offences or offences involving debtors. In particular, aggravated accounting offences, tax offences, dishonesty by a debtor and forgeries, as well as subsidy fraud cases and embezzlement cases increased from the previous year.

When it is noted during a tax audit that the amount of evaded taxes is likely to be significant, it is necessary to consider that criminal proceedings may be pending in parallel with the administrative procedure. It is advisable to start preparing for criminal proceedings when the company suspects that the matter may lead to a criminal investigation after the audit by the Tax Administration.

Appropriate preparation for criminal proceedings includes identifying the criminal law risks involved and considering the key defence arguments. The defence arguments developed can be used not only as a cornerstone of the defence in any subsequent criminal proceedings, but also as a guideline in the administrative procedure. It is important for the taxpayer to maintain consistency between the information and arguments they provide throughout the administrative procedure and any criminal proceedings. This also emphasises the importance of consistency in the documents submitted in the administrative procedure and in the criminal investigation.

Typically, the company will only become aware of the pending criminal investigation when its personnel are called in for questioning by the police. This may occur unexpectedly and at very short notice, making it more challenging to assess the defence arguments. Police questioning conducted during the criminal investigation is of great significance for the entire criminal proceedings. Statements given during questioning may guide the criminal investigation, and any adverse statements can be used against the defendant in a trial. Therefore, proactive and active preparation for criminal proceedings helps the company and its employees to defend themselves from the very first stages of the criminal investigation.

The right not to incriminate oneself should also be taken into account in administrative procedures

The question of the right not to incriminate oneself often arises in tax crimes. In practice, the right not to incriminate oneself means the right not to contribute to the investigation if one is suspected of a crime. The right not to incriminate oneself under criminal law should be taken into account in administrative procedures that are conducted at the same time as criminal proceedings, provided that the following conditions are met concurrently:

• the administrative procedure is pending at the same time as the criminal investigation (concurrence requirement)

• the criminal investigation and the administrative procedure are connected: both procedures relate to the investigation of the same facts (connection requirement)

• the information required in the administrative procedure is also relevant for the determination of guilt in the criminal case (relevance requirement)

• the administrative procedure uses or may use the threat of a sanction, such as a tax increase, as a means of enforcing the reporting obligation

• the disclosure of information obtained in the administrative procedure to the authority investigating the crime is not effectively prevented by law (lack of firewall).

An increasing number of tax audits lead to the consideration of reporting an offence to the police, which may in practice lead to the opening of criminal proceedings either at the same time as or after the administrative procedure. Given the long appeal times in tax assessment, it is clear that there is a risk that these processes occur concurrently. It is therefore important to take into account the right not to incriminate oneself and to assess, for example, the documents to be submitted to the Tax Administration from the point of view of the reporting obligation and possible criminal proceedings.

How to prepare for potential crime proceedings?

Taxpayers should bear in mind the possibility of criminal proceedings from the very beginning of the tax audit. It is important that the company has implemented operating models to comply with the reporting obligation and to answer questions from the authorities. A key element of any operating models is to ensure that responses to requests for information are coordinated and made in cooperation with the company’s management.

Our experienced tax and criminal law experts assist you in managing your tax matters, from tax audits to potential criminal proceedings. By being on the move well in advance and preparing for the possibility of criminal proceedings, you can ensure the best possible defence.