I suddenly received notice of a tax investigation of a sole proprietor. How should I respond?

A tax investigation of a sole proprietor is an investigation procedure conducted by the tax authorities to verify whether the taxes reported by the taxpayer are appropriate.

Being a sole proprietor does not exclude one from being subject to a tax investigation; just like a corporate business, a sole proprietor can be subject to investigation where the reported contents are judged to have errors or a possibility of omission.

During a tax investigation, the business may be asked questions or asked to confirm matters, and inspection and verification of related documents such as books, contracts, and transaction records are carried out.

In this process, materials that serve as the basis for the reported contents, such as sales and purchase records, account transaction details, and contracts, become important criteria for judgment.

Representative cases in which a sole proprietor is selected for a tax investigation include cases where the tax filing is suspected of not being faithful, where the source of funds is unclear, where expenditure is excessive relative to income, and where transactions appear suspicious on the records.

Receiving notice of a tax investigation does not necessarily mean that excessive taxes will be imposed, but because the materials and explanations submitted during the investigation can directly affect the determination of whether tax is imposed, a careful response is necessary.

First, managing the documents and data that serve as the basis for the reported contents is important.

Contracts, sales and purchase records, transaction records, and the like are key materials that can prove the legitimacy of the filing, so they must be systematically preserved.

If such materials are not prepared, there is a possibility of unnecessary misunderstanding or additional taxation.

Also, during a tax investigation, it is not the case that all materials must be submitted unconditionally.

There is no need to submit materials unrelated to the scope of the investigation, and it is important to identify the issues the tax officials seek to verify and to respond with a focus on the core matters.

Responding emotionally or giving impromptu answers during the investigation can instead create an unfavorable situation, so caution is required.

If a taxation disposition is made based on the results of the tax investigation, a pre-assessment review can be requested at the pre-taxation stage, and after taxation, the matter can be contested through an appeal to the Tax Tribunal, administrative litigation, and the like.

A tax investigation of a sole proprietor is a procedure in which tax and legal judgments are made simultaneously.

Because the amount of additional tax assessed and the possibility of a dispute can vary greatly depending on the manner of the initial response, a systematic response is necessary from the investigation stage.

Daeryun Law LLC, through collaboration between tax attorneys and certified tax accountants, provides comprehensive tax legal services, including responding to tax investigations of sole proprietors, submitting opinions at the pre-taxation stage, and handling tax appeals and tax litigation.

If you have received notice of a tax investigation, we recommend reviewing your response direction in advance.