[Jeon Daegyu's 7 Trials and 8 Failures] Tax Investigation on Revived Companies

Today, most taxes are not paid after being imposed by the national or local governments, but are self-reported and paid by the taxpayers themselves. While many taxpayers fulfill their tax obligations faithfully, some taxpayers try to pay less tax, whether legally (tax saving) or illegally (tax evasion). Accordingly, tax authorities need to verify whether taxpayers have reported their taxes honestly and exercise appropriate taxation rights, or collect tax data to determine the tax base and tax amount. The authority granted to tax authorities for the purpose of collecting tax data is the right to conduct tax audits. A tax audit refers to activities such as questioning for the imposition and collection of taxes, inspecting or investigating relevant books, documents, or other items, or ordering their submission.

Tax audits are always at the center of controversy. There are regular tax audits conducted periodically to verify the accuracy of reports, and occasional tax audits conducted when there are specific reports of tax evasion against a taxpayer or clear evidence suggesting omission or errors in the reported content. Whether for corporations or individuals, tax audits are burdensome. There is not only the risk of facing a huge tax penalty but also, in some cases, the possibility of criminal punishment. Most tax audits begin due to regular audits or taxpayer errors, but sometimes there is suspicion that the audit is a selective one with a specific purpose. To eliminate negative prejudice against tax audits, recently, bodies such as local tax review committees have been established to review the subjects of tax audits, ensuring fairness and objectivity.

Currently, a tax audit is underway for Company S, which is undergoing rehabilitation proceedings. Is it appropriate to conduct a tax audit on a company in rehabilitation? The reason for conducting tax audits on companies in rehabilitation lies in the fact that tax claims are, in principle, rehabilitation claims. Tax claims as rehabilitation claims must be reported to the court by the time of the creditors' meeting for the review of the rehabilitation plan at the latest. Otherwise, the tax claims may be extinguished by the approval of the rehabilitation plan. From the tax authorities' perspective, if the rehabilitating taxpayer does not report and pay taxes faithfully, there is a risk of losing the tax claim due to non-reporting. Therefore, it is necessary to clarify the tax claims against the rehabilitating company within the reporting period through a tax audit.

Mistrust of rehabilitating companies is also a cause of tax audits. It is natural for companies to fall behind on taxes when they face difficulties. There is also a strong temptation to manipulate books or omit sales to secure liquidity through tax evasion. In reality, most companies that apply for rehabilitation proceedings have poor accounting records. Therefore, tax authorities consider the application for rehabilitation proceedings as grounds for an occasional tax audit.

Tax audits are a considerable burden from the perspective of rehabilitating companies. The fact that a tax audit is reported in the media puts them in an even more difficult position. Once a tax audit begins, counterparties tend not to maintain business relationships. It is also a financial burden. When a tax audit starts, the rehabilitating company must respond, and obtaining help from experts such as tax accountants or lawyers requires significant costs. Tax revenue from tax audits accounts for only 2-4% of total tax revenue. Since companies need to survive to secure future tax income, tax audits on rehabilitating companies are inevitable to some extent but require careful consideration.

Jeon Dae-gyu, Chief Judge, Seoul Rehabilitation Court