Tax controversy update vol. 2 - Risk-Based Approach (RBA) employed by the NTA for tax examinee selection

Tax examinations have begun returning to their pre-COVID forms with the state of emergency being lifted, as evidenced by tax examiners shifting back to their non-remote work routines. As a result, we have seen an uptick in the number of clients receiving advance tax examination notices in October.

Some of our clients, however, alerted us to their confusion at not having received such notices; these are clients who received advance notices during the prior examination year (i.e. before June 2021) and then had their tax examinations rescheduled due to COVID-19.
It seems apparent that these clients were expecting their tax examinations to resume or commence immediately after the end of the state of emergency.

One of the many potential factors behind this scenario could very well be the NTA applying the risk-based approach (RBA) - or even relying on it more than usual - for their selection of tax examinees.

RBA is a framework under which a company’s tax risk is determined by analyzing and gaining an understanding of their tax corporate governance, business activities, details of filings/book closings, and any improper treatments and relevant reforms being undertaken. The NTA would use this information to ensure that tax examinations are selected appropriately and conducted with an adequate work volume. RBA was announced in June this year to be applied to the companies that the special examiner’s group of the regional taxation bureaus has the jurisdiction over, however, we understand the NTA is also applying the concept of RBA to all companies in practice.

The use of RBA, which is clearly a need driven by the pandemic, is the latest manifestation of the NTA's pivot to a stance favoring high-quality, in-depth tax examinations across the board by pinpointing corporations that are considered high-priority for tax examination and which will require concise examinations to be conducted.

- For those companies that have received advance tax examination notices subsequent to the cancellation of the state of emergency -
It is safe to assume that the above concepts have been employed by the NTA for the selection of your company, and as such there is a strong likelihood that the NTA has identified high-risk items which they have prioritized for examination. Take this as a sign that meticulous preparation for the incoming tax examination will be absolutely necessary.