Tax and accounting compliance is an essential aspect of business management. However, disputes sometimes arise which can expose companies to complex and costly problems. Tax litigation can have significant financial consequences if it leads to penalties and fines, and tax disputes can also damage a company’s reputation.
Our /en/services/accounting/en/services/accounting experts explain what tax litigation is, common causes of disputes and the types of disputes that businesses could face.
Understanding tax disputes
In order to take appropriate tax and accounting measures for your business, it is important to define precisely what a tax dispute is.
What is a tax dispute?
A tax dispute occurs when there is a disagreement between a business and tax authorities related to the interpretation or application of tax laws. A dispute can occur over tax assessment or a difference in the interpretation of tax regulations.
Different types of tax litigation
Tax litigation can take many forms, depending on the specific nature of the dispute. Here are a few examples.
Valuation disputes
These disputes arise when the tax authorities dispute the valuation of a company’s declared property or assets, such as real estate or inventory.
Tax declaration disputes
These are disputes related to errors, omissions or discrepancies in a company's tax returns, including issues surrounding income, deductible expenses or tax credits.
Assessment disputes
These disputes arise when tax authorities impose an additional tax assessment on a company, to challenge the amounts that have been declared.
Financial planning disputes
In some cases, tax authorities may challenge tax planning strategies implemented by a company if they believe that they defy tax laws.
What are common tax litigation mistakes?
Businesses should take proactive steps to avoid the common causes of tax disputes. This includes carefully managing tax returns, understanding and complying with laws and regulations, and consulting qualified tax professionals.
By understanding the various causes leading to tax problems, companies can minimize risk and effectively comply with tax regulations.
Errors in tax reporting
Tax return errors are one of the leading causes of tax disputes. These can include miscalculations, omissions of income or expenses, intentional misrepresentations or technical errors. Errors can result from misunderstanding or misinterpretation of tax laws, or negligence.
Non-compliance with tax laws and regulations
Another common cause of tax disputes is non-compliance with tax laws and regulations. This can include failure to pay taxes owed, to obey corporate tax filing deadlines, to maintain records and documentation, or to comply with specific requirements related to certain transactions or industries.
Differing interpretations of tax laws
Tax laws can be complex and subject to different interpretations. Companies and tax authorities may have differing views on the interpretation of certain tax provisions, which can lead to litigation. Disagreements can arise on issues such as eligibility for tax deductions, the application of tax rules to specific transactions, or the interpretation of tax terms or concepts.
To be on the safe side, it is recommended that you consult a professional who handles tax disputes.
Contested tax optimization strategies
Some companies use legal tax optimization strategies to reduce their corporate taxes. Keep in mind that some of these strategies can be challenged by tax authorities, who have the power to invoke anti-avoidance or anti-abuse rules.
Steps of a tax dispute for a business
When a company is faced with a tax dispute, knowing the key steps in the process is crucial to managing the procedure effectively and reaching a satisfactory resolution. Let's take a closer look.
Notification and request for information from tax authorities
When a company faces a tax problem, the first step is usually a communication from tax authorities. This may take the form of a request for additional information or documentation, or a formal notification of a tax reassessment. The company must respond promptly and provide what the authorities demand.
Negotiation and amicable resolution
In many cases, it is possible to resolve a tax dispute amicably through negotiations with the authorities. By presenting strong arguments, justifications and evidence to support the company's position, negotiations can result in a mutual agreement on tax adjustments, penalties or interest. A tax dispute can be resolved without resorting to more formal procedures.
Tax dispute resolution procedures (e.g. mediation, arbitration)
If amicable negotiations are not successful, it may be necessary to initiate a tax dispute resolution process. Involved parties could rely on mediation or arbitration by a third party as a less formal means of settling than litigation.
Appeals to the administrative courts or the courts of law
If a resolution cannot be reached by other means, a company may choose to take the dispute to an administrative tribunal or to court. This usually involves filing a formal application and preparing for a more formal legal process, in which legal authorities assess the arguments, evaluate the evidence and make a final decision.
Preventing tax and accounting disputes
The best way to manage tax disputes is to avoid them via solid preventive measures. Our corporate tax professionals can provide best practices in tax and accounting compliance, and valuable advice on how to avoid future problems.
Accurate and organized record keeping
Accurate and organized record keeping is essential for avoiding tax disputes. This includes properly documenting financial transactions and retaining business records, bank statements and other relevant documents. Clear and complete records facilitate the preparation of tax and accounting returns, reducing the risk of errors or omissions.
Regular verification of tax and accounting returns
Companies should perform regular audits of tax returns to identify errors and inconsistencies. This may include reconciling internal financial records with filed returns, reviewing calculations and identifying anomalies. Early detection of errors allows them to be corrected quickly and avoid future disputes.
Qualified tax professionals (accountants, tax lawyers)
Engaging qualified accounting and tax professionals can help ensure tax and accounting compliance. Experts can provide accurate advice, interpret current tax laws and regulations, and ensure that returns are properly prepared. They can also help anticipate potential tax risks and implement strategies to avoid them.
Accountant
A tax accountant is the best person to advise you on decisions surrounding a contentious issue. Finding a good accountant is crucial to getting good advice.
However, technical tax expertise could become necessary if a case becomes contentious or increasingly complex. Remember that legally, an accountant has no right to plead.
Tax specialist
A tax specialist is an expert on tax issues and laws. A tax specialist’s expertise is essential if you face litigation because taxation rules are complex and varied. As a manager, it is your responsibility to choose the right tax specialist for your company.
However, like an accountant, a tax specialist cannot plead in court, and can only serve you as an advisor.
Tax Lawyer
A tax lawyer who specializes in tax litigation can offer you the advantages of both a tax specialist and a lawyer, because they are experts who can also plead on your behalf in court.
Through both training and experience, a tax lawyer knows tax law and the subtleties of taxation in practice and will be able to find solutions to help you in court.
Tax lawyers may be expensive, but they can save you a lot of money in return. Get in touch with us for quality referrals!
Avoid tax problems with T2inc!
Preventing tax and accounting disputes is critical to your company's financial health and peace of mind. By adopting good tax and accounting compliance practices, you can minimize the risk of costly and time-consuming litigation.
A good manager establishes a culture of tax compliance within their company by implementing the best practices outlined above. Contact our team of qualified tax and accounting professionals to help you navigate the complexities of the tax system and minimize the risk of litigation.
Frédéric Roy-Gobeil
CPA, M. TAX
As President of T2inc.ca and an entrepreneur at heart, I have founded many start-ups such as delve Labs and T2inc.ca. A former tax specialist at Ernst & Young, I am also a member of the Ordre des comptables professionnels agréés CPA and have a master's degree in taxation from the Université de Sherbrooke. With a passion for the world of entrepreneurship and the growth mindset, I have authored numerous articles and videos on the industry and the business world, as well as on accounting, taxation, financial statements and financial independence.
