Preparing for Tax Audits: High-Risk Areas and Defense Strategies

In Turkey's evolving tax environment, companies must be ready not only to comply with legislation but also to respond effectively to tax audits, which have become more frequent and comprehensive in recent years. Proactive preparation can significantly reduce financial and reputational risks. In this article, we explore the most commonly audited areas and outline practical defense strategies for businesses.

Which Areas Are High-Risk?

Tax inspectors tend to focus on certain types of transactions and operational patterns. The following areas frequently draw scrutiny during audits:

• Transfer pricing: Intercompany transactions must be properly documented and conducted at arm’s length.
• VAT refund claims: Large refund amounts often trigger detailed audits.
• Non-deductible expenses (KKEG): Improperly classified or undocumented expenses may be disallowed, increasing the tax base.
• Cash transactions and POS activity: These are red flags for unrecorded sales, especially in retail and service sectors.
• Cross-border payments: Payments to foreign entities (especially consultancy or service fees) may raise questions around withholding tax compliance.

What Are Effective Defense Strategies?

A strong defense in tax audits depends on robust documentation, internal consistency, and timely responses. Key recommendations include:

• Build a culture of documentation: All transactions should be properly supported by contracts, invoices, bank records, and internal approvals.
• Maintain annual transfer pricing reports: These are mandatory for related-party transactions and help justify pricing policies.
• Conduct regular tax risk reviews: Identify and address exposure areas through internal audits or third-party advisory support.
• Review past transactions: Critical issues like incentives, depreciation, and major investments from the past 5 years should be re-evaluated for compliance.
• Prepare a clean audit file: A structured file containing transaction summaries, documentation, and explanatory notes will significantly ease the audit process.

The Value of Expert Advisory

Tax audits are not merely technical—they involve strategy, communication, and risk management. Partnering with experienced tax advisors can prevent costly penalties and ensure a more manageable audit process from start to finish.