A few reasons why the National Revenue Agency (NAP) audits companies

Bulgaria has a system for monitoring compliance with tax and social insurance legislation which, although imperfect and not sufficiently effective, still works.

Every entrepreneur, whether just starting out or already experienced, should consult an accountant before any transaction or action that touches in one way or another on disputable matters in accounting and personnel management. A business owner has to walk a fine line so as not to come into conflict with accounting or tax legislation, while at the same time using every opportunity to optimise taxes and social insurance contributions within the law.

Knowing the main grounds for audits that the tax authorities may launch will help you avoid their close attention. Here are just the main ones:

1. Failure to submit documents. For example, you did not file a ЗДДС return, an annual tax return, an annual financial statement, social insurance declarations, etc. on time. This raises suspicion and serves as grounds for an audit.
2. Reports from fiscal devices showing unusual turnover. Tax inspectors are able to track companies’ turnover thanks to the remote connection to fiscal devices. When it is suspiciously low or uneven, this may be a signal that income is being concealed. Example: a 150-seat resort restaurant has an average daily turnover of 200 leva during the summer season. Or a grocery store reports no sales all day, and then at the end of the day the number of sales becomes unnaturally high — clearly the turnover is being adjusted somehow. The reverse situation is no less suspicious: at a retail outlet open until 7 p.m., the cash registers abruptly stop sending turnover data after 5.30 p.m. (the end of the working day at the tax office).
3. The company operates in a risky field. There are areas of activity that traditionally attract the attention of the tax administration because of the large number of abuses. These include construction, the sale of high-value goods, gambling, tourism, currency exchange offices, entertainment venues and others. The list of such risky areas of activity is updated every year, with new fields added where there is an increased risk of concealed income and fraud.
4. Staff work mainly part-time. It is no secret that many companies, in order to save on social insurance contributions and other payments, officially hire staff for a 4-hour working day, although in reality the working time is the standard 8 hours. For this reason the Labour Inspectorate and NAP often inspect such organisations.
5. Concluding a large number of civil contracts. The risk of a visit from inspectors increases if a company actively concludes civil contracts. Suspicion arises that these are employment contracts disguised in order to save on taxes. If the Labour Inspectorate and NAP establish that the contractors under a civil contract have a workplace and fixed working hours, this means that it is a disguised employment contract.
6. Audits of counterparties. Your company may be inspected in connection with an audit of a counterparty (a supplier or client) in order to compare the declared accounting data submitted by both organisations. This often happens during audits related to the improper use of a tax credit.
7. Excessively high travel expenses. If a company reports disproportionately large expenses for business trips, transport and hotels, while the results of this vigorous activity are not obvious, suspicion may arise that the expenses are somewhat exaggerated. A tax inspector may request documents certifying that the constant travel is connected with the company’s work and has been properly documented.
8. Too many intermediaries in transactions. Transactions with a large number of intermediaries, especially if this is untypical for the particular type of activity, attract the attention of the tax service. A large number of sham transactions is often linked to one of the companies in the chain not paying taxes.
9. Large expenses during a company crisis. If a company is loss-making or brings in minimal income, management usually decides to optimise expenses. But if a loss-making enterprise constantly renews its vehicle fleet or maintains an expensive office, the company may be suspected of concealing turnover.
10. Frequent changes of bank accounts. If a small company constantly closes accounts and opens new ones, this arouses interest on the part of NAP. Such behaviour makes it difficult to monitor the current financial situation and is typical of companies engaged in money laundering.
11. Constantly receiving and sending money or valuable consignments. If such activity is not connected with the company’s work, it is highly questionable from the point of view of the tax service.
12. Transactions with related parties. Where there are a large number of transactions with related parties, the tax authorities may decide to check both the reality of such transactions and the correctness of the pricing. An example of abuse: a company operates and earns in France, where a very high profit tax must be paid. The owner registers a company in Bulgaria, which starts providing consultancy to the French one at inflated prices. In such a situation the Bulgarian company receives, at the expense of the French one, profit that is taxed in Bulgaria at significantly lower rates. In such a situation the tax authorities must satisfy themselves that the services are real and that their prices are close to average market levels.
13. Large amounts of cash. In such a case doubts arise about hidden distributions of profit. Many owners periodically take money from company accounts and spend it on personal needs. But for such money to become the owners’ property, it must be distributed as dividends with the additional payment of a 5 per cent tax. Another reason for accumulating large amounts of cash is paying staff wages in hand over and above the officially declared amounts in order to save on taxes and social insurance contributions.
14. Paying large sums in cash. Under the law, at present no more than 10 thousand leva may be paid in cash. If the total amount under a contract exceeds 10 thousand leva, partial payment in cash is also not possible. If there are doubts about compliance with the Law on Restricting Cash Payments, this will become grounds for an audit.
15. Customer reports about missing cash receipts. Frequent reports from customers that they were not given a receipt may, in addition to the mandatory fine, also lead to a thorough inspection of the company, since doubts arise about concealed turnover.
16. Offshore zones. Companies that have any kind of connection with offshore jurisdictions invariably attract the attention of the tax authorities. This is because such transactions not only help to save on tax payments, but also serve to conceal turnover.
17. If a company has been recorded as loss-making for a long time while its owners lead a luxurious lifestyle.
18. Large debts. The tax authorities closely monitor the activities of companies with substantial tax and social insurance liabilities.
19. Foreign trade activity without a warehouse or a contract with freight forwarders. If a company declares large turnover from import or export transactions while at the same time having no owned or rented warehouse premises and no contracts with transport companies, such activity will sooner or later attract the attention not only of the tax service but also of the police. Suspicions of smuggling arise.
20. Large liabilities of the company towards its owners. Under the law, owners may finance the company for a certain period, but such financing must be short and the funds must be used for their intended purpose. If financing takes place too often, however, this may indicate concealed income. In addition, the NAP authorities may also check the origin of the owners’ funds, i.e. individuals may face an inspection as well.
21. Online trade using couriers. Online purchases are often paid for by cash on delivery through a courier. A tax inspector may request from the courier company statements of all consignments and payments in order to compare the data with what has been declared in the accounting reports.
22. Abuse and tax evasion on a particularly large scale are punishable in Bulgaria by imprisonment of up to 8 years and partial or full confiscation of property. We have listed the main indicators that may arouse suspicion on the part of the tax services and lead to unscheduled inspections.

To avoid audits and the worries that come with them, we recommend that conscientious owners and managers use the services of reliable, proven accounting firms with a good reputation. This will help avoid risks and unfounded suspicions on the part of NAP representatives.

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