Challenging Decisions and Actions of Tax Authorities

Every business, regardless of its size, country of origin, or field of activity, and every individual entrepreneur regularly interacts with tax authorities. These can be routine tax audits, filing reports, or registering tax invoices. At first glance, ordinary tax relations with businesses should not take much time or cause any difficulties. However, tax authorities’ actions are not always correct or lawful. Errors in calculations, subjective interpretation of legislation, or even technical glitches can lead to unlawful tax reassessments, fines, blocking of tax invoices, or even the suspension of business activities altogether.

However, taxpayers are not defenseless against fiscal pressure. The law provides effective mechanisms for appealing tax authorities’ decisions, both within the administrative (pre-trial) procedure and through the court system. Proper use of these tools allows for the cancellation of unlawful tax demands and the avoidance of financial and legal risks.

At the same time, the appeal procedure has its nuances that should be known in advance. Success depends on complying with deadlines for appealing tax authorities’ decisions, correct argumentation, and a well-prepared evidentiary base. Often, it is more beneficial for a business to consult lawyers at the stage of a tax audit to prevent potential risks. Tax lawyers of the Dominion Law Firm take on the entire burden of communication with tax officers and proving your innocence in both pre-trial and court procedures, allowing clients to focus on their business activities.

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Types of Tax Audits and Main Types of Violations by Taxpayers

In Ukraine, there are several types of tax audits, each with its own features and procedures. The main types of audits include:

• Documentary audits — audits based on documents submitted by the taxpayer. They can be planned or unplanned and cover the verification of the correctness of tax, fee, and other mandatory payments calculation and payment.
• Desk audits (Cameral audits) — conducted without a field visit, directly at the tax authority’s office. This involves checking submitted reports and can be initiated based on the analysis of tax declarations or other taxpayer documents.
• Planned audits — conducted according to tax authorities’ approved audit plans, formed at the beginning of the year. They focus on verifying tax obligations of companies that regularly fulfill their duties.
• Unplanned audits — can be initiated in cases of tax obligation violations or upon receipt of information about possible violations, for example, complaints about the taxpayer’s activity or suspicions of tax evasion.

The tax service can impose fines for various violations. The main reasons for fines include:

• Late payment of taxes — fines for late payment or underpayment of taxes.
• Incorrectly filed reports — fines for submitting false or incomplete data in tax declarations.
• Tax evasion — including manipulating income and expense accounting or using “fictitious” transactions to reduce tax liabilities.
• Violation of accounting and document storage rules — fines for improper bookkeeping or lack of documents confirming transactions.
• Non-compliance with tax authorities’ requirements — refusal to provide requested documents or to participate in the audit.

Fines can be significant and seriously affect the financial condition of an enterprise, so it is important to comply with all tax requirements and fulfill tax obligations in a timely manner, and in case of tax authority violations, legally challenge unlawful actions and inactions.

The Importance of Challenging Actions of Tax Authorities

Unlawful decisions of tax authorities lead to serious consequences for taxpayers, including:

• Financial losses: additional tax assessments, fines, and penalties.
• Restrictions on activity: blocking of tax invoices, freezing of accounts.
• Reputational risks: inclusion in the list of risky taxpayers or tax debtors, negatively affecting the prospects of contracting with new counterparties.

Challenging such decisions allows not only to protect one’s rights but also to prevent negative consequences in the future.

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Procedure for Challenging Tax Authorities’ Decisions

Challenging tax authorities’ actions under the Tax Code of Ukraine is possible by two methods: through an administrative (pre-trial) procedure or in court.

Regardless of the chosen appeal procedure, it is necessary to thoroughly review the tax audit report for errors and grounds for appeal, gather and study all necessary documents and evidence supporting your position (contracts, primary documents, and other information).

Administrative Appeal Procedure

Administrative appeal of tax authorities’ decisions involves submitting a complaint to the higher authority of the State Tax Service of Ukraine (STS) without going to court. This allows faster and cost-free reconsideration of the disputed decision, reducing risks for the business. During the complaint review period, the appealed decision is not enforceable, which can be beneficial for the business.

The administrative appeal process is as follows:

• Appeal deadlines: the taxpayer has 10 working days from the date of receiving the audit report (certificate) to submit objections to the audit report along with additional explanations and documents confirming the absence of guilt.
• Consideration of objections: the controlling body must review objections within 10 working days and provide a response. The taxpayer has the right to participate in the review personally or through a representative, including via video conference. The absence of the taxpayer (or representative), duly notified, is not an obstacle to reviewing the complaint.
• Receiving a Tax Notice-Decision (TND): if objections are rejected, the tax authority issues a Tax Notice-Decision. This is a notification about the obligation to pay the tax liability or make changes to reports.
• Filing a complaint against the TND: if disagreeing with the TND, the taxpayer has the right to submit a complaint to the higher authority of the STS within 10 working days from the date of receiving the TND.
• Complaint review: the STS reviews the complaint within 20 calendar days, with the possibility of extension, but no longer than 60 calendar days.

It is important to remember that the taxpayer, simultaneously with filing a complaint to the higher controlling body, must notify in writing the controlling authority that determined the tax liability amount or made another decision about the appeal of the tax notice-decision or any other decision.

In practice, administrative appeals of tax decisions often do not yield the desired result. The STS usually supports the position of tax commissions, making the appeal process through the STS inefficient. This is due to the internal policy of the tax service aimed at maximizing budget revenues, which sometimes leads to upholding appealed decisions without considering the actual circumstances.

Therefore, in many cases, businesses and individual entrepreneurs who have not achieved results through administrative appeal have only one option — to go to court. Court appeals offer better chances for an objective case review, as the judiciary can reasonably assess the legality of tax authorities’ decisions. The court process also allows applying various legal tools to protect one’s rights, and, as practice shows, court decisions often cancel additional tax assessments or fines.

Judicial Appeal

Judicial appeal of a Tax Notice-Decision after administrative appeal is conducted through an administrative court at the taxpayer’s place of registration. A lawsuit challenging tax authorities’ decisions can be filed within three months from the date of receiving the decision following the administrative appeal. If there was no prior administrative appeal, the lawsuit must be filed within six months from the day the taxpayer received the disputed decision or from the day the taxpayer knew or should have known about the violation of their rights. It is advisable not to delay to minimize the risks of forced enforcement.

Court proceedings allow not only to cancel unlawful tax reassessments but also to restore the violated rights of an entrepreneur or company.

It is important to prepare the claim properly, justify your demands, and provide sufficient evidence. Even if you are confident in your position and have all grounds to challenge a tax decision, a poorly drafted claim can greatly complicate your situation. Errors in formulating claims, insufficient argumentation, or lack of proper evidence can lead to dismissal or delays in the court process. Moreover, the court may refuse to consider the claim due to procedural violations, resulting in loss of time and opportunity for effective protection. In some cases, a poorly constructed defense strategy can even increase risks for the business, for example, if the tax authority receives additional grounds to impose fines.

An additional advantage of involving tax lawyers is that the practice of the Supreme Court (the court of cassation instance, whose conclusions are considered by lower courts) is constantly changing and contains ambiguous statements that can be interpreted either in favor of or against the tax authorities. Qualified lawyers continuously study court practice and use the necessary conclusions.

Lawyers can represent your interests in court without your participation. Therefore, it is worth thoroughly preparing and engaging tax specialists from the Dominion Law Firm, who will develop a clear and legally correct position and attend court hearings on your behalf.

Get a Consultation with a Tax Lawyer for Challenging a TND

The judicial process can last from several months to several years, depending on the court’s workload and case complexity. In most cases, tax authorities do not stop at the first-instance court and appeal decisions to appellate and cassation courts, extending the review for years. However, if successful, the tax authority must cancel unlawful claims and reimburse your court costs (court fees, attorney fees).

In conclusion, challenging actions of tax authorities is an important procedure to protect taxpayers’ rights because errors in tax assessments or unlawful actions can significantly affect the financial stability of enterprises and individual entrepreneurs. However, it is important to remember that although an administrative appeal is the first step in this process, in practice, it often does not yield desired results due to the tendency of tax authorities to uphold their decisions. In such cases, judicial appeal becomes a necessary step to achieve a fair dispute resolution. Ultimately, it is important to carefully evaluate all appeal options and choose the one that best suits your case circumstances.