What Tax Authorities Really Look for During Audits: Insider Perspective

By Linda Athanasiadou, expert in fraud and scam prevention, audit, anti-money laundering (AML)

Many business owners fear tax audits — often because they don’t fully understand what triggers them. Contrary to common belief, it’s not always about the size of your revenue or the complexity of your return. Auditors are trained to identify behavioral patterns, inconsistencies, and gaps in internal documentation that may indicate potential risks or poor governance.

As someone who has spent years helping companies prepare for and navigate audits, I’ve seen firsthand where attention naturally gravitates. If you want to reduce your exposure and build trust with regulators, understanding what tax authorities actually look for is the first step.

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1. Inconsistent Financial Narratives One of the first things auditors examine is whether your numbers tell a consistent story across all filings — income tax, VAT, payroll, and financial statements. Discrepancies between what’s reported and how your business operates — for example, low declared income alongside high employee count or significant asset acquisition — prompt deeper analysis.

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2. Abrupt Year-End Adjustments Sudden changes in financials at the close of the fiscal year — such as major write-downs, spikes in expenses, or revenue deferrals — are not automatically suspicious, but they do raise questions. Authorities will assess the timing and rationale behind these moves, especially if they appear to serve a tax optimization purpose without operational justification.

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3. Unsupported Deductions or Credits Legitimate tax positions require thorough documentation. Whether it's R&D credits, international expenses, or intra-group service fees, authorities want to see the underlying contracts, invoices, and proof of economic substance. Missing or vague documentation, even if unintentional, can result in denied deductions or back assessments.

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4. Payroll and Workforce Classifications Employment tax compliance is a key area of focus. This includes proper classification of workers (employee vs. contractor), correct withholding, and accurate reporting of all forms of compensation and benefits. Misalignments between HR and finance teams often lead to inconsistencies that attract regulatory attention.

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5. Related-Party Transactions Transfer pricing — or the pricing of services, loans, and goods between affiliated companies — must reflect arm’s-length standards. If your organization operates internationally or has subsidiaries, expect auditors to scrutinize intercompany agreements, pricing models, and documentation justifying the methodology used.

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6. Absence of Internal Controls Even when tax positions are defensible, a lack of clear internal processes can undermine credibility during an audit. Authorities often request internal policy documents, approval workflows, and board minutes to assess whether decisions are made transparently and with accountability.

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7. Repetitive Use of High-Risk Positions If a business consistently relies on certain aggressive tax strategies year after year without updating its supporting rationale, that pattern may prompt questions. Even if a deduction or structure was accepted in the past, regulators expect ongoing justification and alignment with evolving rules and business context.

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Preparing for Audit Starts Before You're Audited To reduce audit risk, consider the following steps:

• Review your filings for consistency across tax types and years.

• Maintain organized, accessible documentation for all material tax positions.

• Perform internal audit readiness checks — ideally annually.

• Update your tax policy to reflect operational changes.

• Ensure your finance, HR, and legal departments are aligned on compliance practices.

Tax authorities are not looking to penalize companies acting in good faith. But they do expect transparency, structure, and discipline — especially as global compliance expectations continue to rise.

If you want to strengthen your audit posture and stay ahead of regulatory expectations, I also recommend reading my article: “Auditing Standards and Combatting Fraud.” It offers a practical framework for internal compliance teams seeking to enhance oversight and credibility.