Tax inspections. How tax authorities’ approaches to control has changed following the introduction of VAT Automated Control System 2 and Tax Automated Information System 3

The tax reforms introduced over recent years were primarily aimed at improving tax administration, and as a result, the shadow economy has substantially reduced.

Elena Rybnikova
Head of Internal Audit, Expertise and Methodology Department

The introduction of a VAT Automated Control System is one of the measures taken to crackdown on the “grey” economy. 

The electronic administration of VAT has allowed to fully automate the process of control over the movement of funds, and among others, see whether VAT is paid, as well as put an end to cash-out schemes related to unlawful VAT refunds. Thanks to the introduction of these systems, VAT is now the tax that is the most easily administrated. 

VAT Automated Control System 2 and VAT Automated Control System 3, as well as Automated Information System are intended to analyze and process the information received by the Federal Tax Service. Introduced as far back as 2013, these programs are still being worked on and improved. They help extending the control function fulfilled by the Federal Tax Service to 100% of taxpayers. This was not possible when data were processed “manually”.

VAT Automated Control System 3 is currently running in test mode. One of the main differences compared with VAT Automated Control System 2 is that tax officers will have access to information about the bank accounts of individuals, and connections between legal entities and individuals will be made automatically. Once testing is completed, this system will be applied nationwide.

Pros and cons for taxpayers

The first stage of desk audits will be conducted automatically. And, if there are no claims from the “automated system”, desk audits conducted by inspectors will be completed more rapidly, i.e. within 3 months. This will allow refunding taxes faster, thus returning money to business quicker. 

Another advantage is that fly-by-night companies will be identified almost immediately, and this will improve the quality of market players. Previously, having set up a company, it was possible to “rest” in the certainty that no inspections would be made for three years, and naturally this was used by unscrupulous taxpayers. Now, however, each tax return submitted by each registered company and individual entrepreneur will be reviewed by the system in 100% of cases with complete elimination of human error.

There will be disadvantages only for unscrupulous taxpayers as it is now almost impossible not to file tax returns and not to pay tax. The impartial “automated system” rather than a single inspector checks data in tax returns and flags discrepancies in all agencies of the Federal Tax Service. 

Another disadvantage for gray businesses is that these programs will serve as evidence of fraud and may result not only in administrative penalty, but also in criminal cases.

The introduction of these systems could still give rise to software failures and faults. It should be noted that such failures and faults are eliminated with each new software version. Having found a gap in the chain as a result of a failure, the software can start charging penalties, suspending taxpayers’ accounts so that companies have to prove that they dutifully pay taxes and exercise caution when selecting their business partners.