Tax audit lawyers in Bulgaria. Defence within inspections.

A tax inspection or tax audit in Bulgaria is one of the most serious administrative proceedings that both individuals and companies may face. From the very first action of the tax authorities, a formal process begins that can result in the assessment of additional tax liabilities, accrual of statutory interest, administrative penalties, freezing of bank accounts, or even subsequent enforcement measures.

Much like an IRS audit in the United States or an HMRC investigation in the United Kingdom, the procedure is not merely informational. It is structured, evidence-based, and potentially adversarial. However, unlike many US audits—where resolution may occur through negotiation before formal assessment—or certain UK compliance checks that begin informally, Bulgarian tax audits are highly formalised from the outset and governed by strict procedural rules.

Very often, the initial reaction determines the outcome of the entire proceeding. Unprepared explanations, incomplete documentation, missed deadlines, or incorrect communication with the revenue authorities can lead to unfavourable consequences that are difficult to reverse later. A tax audit in Bulgaria is not an administrative formality — it is a procedure with clearly defined stages, evidentiary standards, and statutory deadlines.

During an inspection or audit, the revenue authorities have broad investigative powers. They may request accounting records, bank statements, contracts, electronic data, conduct cross-checks with third parties, take written explanations, and analyse the overall financial activity of the person or company. This is comparable to the document production requirements in an IRS examination or the information notices issued by HMRC.

At the same time, the taxpayer has specific procedural rights — the right to legal defence, the right to participate in the collection of evidence, the right to submit objections, and the right to challenge the audit act before administrative and judicial authorities. In Bulgaria, judicial review of tax acts is carried out by the administrative courts, which examine both legality and factual justification.

Legal defence in a tax audit does not begin only when a final assessment is issued. It begins at the very first procedural step — upon service of the audit assignment order or the initial request for documents. A strategic approach includes analysing the scope and subject matter of the audit, assessing risk exposure, preparing supporting documentation in advance, and ensuring careful procedural conduct at every stage.

Particular importance attaches to the phase of objections against the draft audit report. Properly structured legal arguments at this stage may result in partial or full revision of the findings even before the final tax assessment is issued. If a formal tax assessment act is issued, it may be challenged first through administrative appeal and subsequently before the competent administrative court. The court will examine whether the tax authority has correctly applied substantive law, respected procedural safeguards, and properly evaluated the evidence.

Tax proceedings often affect not only the immediate financial stability of a business but also its reputation, commercial relationships, and access to financing. In the United States, an unresolved IRS audit may impact creditworthiness and trigger federal tax liens. In the United Kingdom, an HMRC dispute may affect regulatory standing and banking relationships. Similarly, in Bulgaria, tax proceedings can have broader commercial implications beyond the assessed amount itself.

For this reason, professional legal defence has not only procedural but also strategic significance.

When Do You Need a Tax Lawyer in Bulgaria?

If you receive a call or formal notice from the National Revenue Agency, timely legal assistance is critical.

Our team of tax lawyers at BSLC (Black Sea Law Counsel) can assist in the following situations:

• When a tax inspection or audit has been initiated and a defence strategy must be structured from the outset
• When accounting documents, bank statements, or written explanations have been requested and it is necessary to assess what should be provided and in what scope
• When there are risks of significant additional tax assessments
• When a draft audit report has been issued and reasoned objections must be prepared
• When a final tax assessment act has been issued and administrative appeal is required
• When procedural representation before the Administrative Court is necessary
• When the audit concerns related parties, intra-group transactions, or transfer pricing matters
• When there are indications of future security measures or enforcement proceedings
• When the tax inspection concerns personal income, assets, or discrepancies between declared income and lifestyle indicators

In such proceedings, timing, precision, and strategy are decisive. Early legal intervention often prevents adverse consequences before they materialise in a final assessment act.

What Is the Difference Between a Tax Inspection and a Tax Audit in Bulgaria? Can an Inspection Escalate into an Audit?

In the practice of the Bulgarian National Revenue Agency, a tax inspection and a tax audit are two distinct proceedings under the Tax and Social Security Procedure Code, yet they are directly connected. In many cases, the inspection serves as the first step toward a more serious proceeding — a tax audit.

Understanding the difference between the two is crucial for building the correct defence strategy.

In comparative terms, this distinction in Bulgaria is somewhat similar to the difference between a preliminary compliance review and a full IRS audit in the United States, or between an HMRC compliance check and a formal enquiry in the United Kingdom. However, the Bulgarian procedural framework is more formally codified from the outset.

Tax Inspection – Preliminary Control Procedure 📂

A tax inspection is regulated under Art. 110 et seq. of the Tax and Social Security Procedure Code.

Its purpose is to establish specific facts and circumstances, without definitively determining tax liabilities.

What is the purpose of the inspection?

• To determine whether obligations under a specific tax law have been fulfilled
• To clarify the origin of certain amounts
• To verify the correctness of specific transactions
• To establish facts related to VAT registration
• To analyse the risk of tax discrepancies

The inspection usually ends with a protocol, not with a tax assessment act. It is not intended to directly determine additional tax due.

This resembles certain IRS correspondence audits, which may close without adjustment, or HMRC risk reviews that conclude without formal assessment. However, in Bulgaria, even this preliminary phase often forms part of a broader enforcement strategy.

Why should an inspection not be underestimated?

Although it does not directly result in sanctions, the inspection:

• creates an evidentiary base
• provides information about the behaviour of the person or company
• enables analysis of financial activity
• may reveal grounds for a subsequent audit

In many cases, the inspection acts as a “filter” through which the National Revenue Agency decides whether to initiate a full audit proceeding.

The inspection may focus on:

• a specific transaction
• a specific period
• a particular type of tax
• the existence of certain documents
• compliance with registration or declaration obligations

The inspection does not conclude with a tax assessment act. It usually ends with a protocol.

⚠️ Important: Although formally appearing “lighter,” the inspection is frequently used as a tool for gathering information, conducting risk analysis, and determining whether an audit should be assigned.

In comparison, IRS and HMRC often perform data-matching exercises before launching formal audits. The Bulgarian inspection phase functions in a similar analytical capacity.

Tax Audit – Proceedings for Establishing Tax Liabilities ⚖️

An audit is a significantly more serious and formalised procedure.

According to Art. 112 of the Tax and Social Security Procedure Code, the audit is assigned through an order for initiation of audit and aims at:

• establishing tax and social security liabilities

The audit:

• covers a specific period
• analyses the entire financial activity
• includes collection and evaluation of evidence
• ends with an audit report
• concludes with a tax assessment act

The tax assessment act may establish:

• additional tax due
• statutory interest
• penalties
• denial of input VAT credit
• transformation of financial results

It is subject to administrative and judicial appeal.

In comparative perspective, this is functionally equivalent to a formal IRS examination resulting in a Notice of Deficiency, or an HMRC formal assessment following enquiry. However, Bulgarian law provides a structured two-phase model — audit report followed by tax assessment act — which is distinct from the US deficiency notice procedure.

Can an Inspection Escalate into an Audit? 🔎

Yes — and this happens frequently.

In practice, the inspection serves as an initial mechanism for gathering information. If during the inspection the revenue authorities establish:

• discrepancies between declared and actual turnover
• inconsistencies in accounting
• suspicious transactions
• indications of concealed income
• unjustified expenses
• risky counterparties

this may lead to the issuance of an order for initiation of audit.

📌 In this sense, the inspection is often a “pre-audit phase.”

Under US practice, similar escalation may occur when an initial compliance check expands into a field audit. In the UK, HMRC enquiries may widen in scope once irregularities are detected. Bulgaria follows a comparable logic, but within a codified procedural structure.

Underestimating the inspection is therefore a serious strategic mistake.

What Do Tax Inspectors Usually Aim to Achieve During an Inspection?

A tax inspection within the meaning of Art. 110 et seq. of the Tax and Social Security Procedure Code is not a random action. It always has a specific purpose and is usually part of a broader control strategy of the National Revenue Agency.

In practice, inspectors pursue several main objectives that must be understood from the very beginning of the proceeding.

1. Establishing Risk of Concealed Income 💰

One of the main objectives is to verify whether declared income corresponds to actual activity.

Inspectors analyse:

• bank account turnover
• cash balances
• inventory quantities
• comparison between purchases and sales
• profit margins relative to industry benchmarks

Often, official accounting data are compared with external information — data from counterparties, banks, customs authorities, or other institutions.

This is similar to IRS indirect income reconstruction methods such as the bank deposits method, or HMRC lifestyle and asset-based risk assessments.

2. Verification of Improper VAT Credit Use 📑

For VAT-registered persons, inspectors often verify:

• the reality of supplies
• economic justification of expenses
• existence of genuine commercial activity
• whether counterparties are risky or “missing traders”

The objective is to determine whether input VAT has been improperly exercised.

This resembles the UK’s focus on missing trader intra-community fraud and HMRC’s strict scrutiny of input VAT recovery, as well as the IRS examination of substantiation for deductible expenses.

3. Gathering Evidence for a Possible Audit 🔎

The inspection often precedes assignment of an audit.

Authorities may:

• gather information about operational methods
• analyse accounting discipline
• assess risk of significant additional assessments
• identify potentially problematic periods

If substantial discrepancies are established, the inspection may escalate into an audit under Art. 112.

4. Verification of Income–Asset Consistency 🏠

Particularly for individuals, the inspection may aim to:

• compare declared income with acquired property
• analyse bank transfers
• clarify the origin of funds
• establish discrepancies between expenses and official income

This often precedes audit under indirect methods.

Comparable to the IRS net worth method or HMRC unexplained wealth inquiries, Bulgarian law also permits indirect reconstruction of taxable base.

5. Control Over Fiscal Discipline 🧾

For commercial establishments, inspectors verify:

• issuance of fiscal receipts
• correct registration of fiscal devices
• compliance with VAT requirements
• correspondence between cash balances and reported sales

In certain cases, this may lead to coercive administrative measures.

6. Verification of Related Parties and Intra-Group Transactions 🔗

For companies, the focus may include:

• profit shifting
• transfer pricing
• transactions between related parties
• artificial reduction of taxable results

This is closely aligned with global OECD-driven transfer pricing scrutiny, and mirrors IRS and HMRC transfer pricing examinations.

What Does This Mean for the Inspected Person? ⚖️

A tax inspection is almost never a mere formality.

It is a tool for:

• risk analysis
• evidence gathering
• building the future position of the administration

How the person reacts, what documents are provided, and how explanations are formulated often determine whether:

• the inspection will conclude without consequences
• an audit will be assigned
• more severe measures will follow

What Are the First Actions of Inspectors? 📑

When an inspection or audit begins, revenue authorities act within their powers under Art. 12 of the Tax and Social Security Procedure Code.

The first actions usually include:

1. Service of an act initiating proceedings
   • In case of audit – order for assignment under Art. 112
   • In case of inspection – request for documents under Art. 37

This moment is crucial — procedural deadlines begin to run.

2. Request for documents and information

Under Art. 12, para. 1, items 6 and 7, authorities may request:

• accounting documents
• contracts
• bank statements
• electronic data
• reports
• originals and certified copies

Under Art. 12, para. 1, item 8, they may also require declaration of bank accounts domestically and abroad.

3. Access to premises

Under Art. 12, para. 1, item 4, authorities have the right to access controlled premises.

4. Cross-checks

Inspections of counterparties, suppliers, and related persons are common.

These actions resemble IRS summons authority and HMRC information notices, although procedural safeguards differ.

How to Protect Yourself at the Beginning? 🛡️

1. Do not underestimate the inspection
   Everything provided becomes part of the evidentiary record.
2. Analyse the scope of the request
   Assess subject matter, period, and actual risk.
3. Do not provide information beyond what is requested
   Excess documentation may expand the scope.
4. Prepare written explanations carefully
   Statements during inspection are often used later in audit.
5. Monitor deadlines
   Procedural deadlines under Bulgarian law are short.
6. Build strategy rather than react emotionally

Impulsive reactions frequently complicate proceedings.

Why Early Defence Is Critical 🎯

In most cases, the outcome of a tax audit is largely shaped during the initial phase.

If, already at the inspection stage, proper arguments are structured, supporting evidence is prepared, and a coherent procedural position is developed, the risk of substantial additional assessments is significantly reduced.

Early legal intervention:

• limits the scope of risk
• prevents escalation into a full audit
• prepares defence for potential appeal
• protects financial stability and business reputation

In comparative terms, experienced US tax practitioners often emphasise that the “record is built during the audit.” The same applies in the United Kingdom, where HMRC enquiries frequently turn on early documentary explanations.

In Bulgaria, however, the procedural structure is particularly strict — once findings are formalised in an audit report, reversing them becomes considerably more difficult.

What Happens If I Do Not Respond to an NRA Request for Documents?

When the National Revenue Agency sends a request for documents, this is not an informal letter that can be ignored. It is a procedural action within an inspection or audit. Failure to respond may lead to serious financial, procedural, and even sanction-related consequences.

In tax proceedings, evidence is decisive. If you do not provide it, the revenue authority will build its findings on the basis of the information available to it — and this rarely works in your favour.

Under US practice, failure to respond to an IRS summons may lead to enforcement action in federal court. Under UK law, non-compliance with HMRC information notices may result in penalties. Bulgarian law is similarly strict, but includes additional mechanisms allowing the tax authority to reconstruct the tax base indirectly.

1. Legal Framework – The Obligation to Cooperate Is Not Optional

The Tax and Social Security Procedure Code imposes an explicit duty of cooperation on the inspected or audited person.

Particularly important is Art. 116.

According to Art. 116, para. 1:

“Where, for the purpose of determining the liabilities of the audited person, it is necessary to clarify facts and circumstances outside the territory of the country, the audited person shall be obliged to present evidence clarifying them.”

This means that if the transaction, payment, or circumstance has an international element, the burden of proof lies with you.

The situation is even more categorical in cases involving related parties. The same provision states:

“Where relations or transactions are between related parties… it shall be presumed that the audited person had the possibility to present evidence.”

The law proceeds from the presumption that access to information exists in related-party situations. If you fail to provide it, the risk rests entirely on you.

This is conceptually similar to transfer pricing documentation obligations in the US and UK, where failure to maintain contemporaneous documentation may shift evidentiary burden and trigger adjustments.

2. If You Do Not Present Evidence – The NRA Will Determine Market Prices and the Tax Base Instead of You

Art. 116, para. 4 provides:

“Where the audited person fails to fulfil the obligations under paras. 1 and 2, the revenue authority shall have the right to determine market prices on the basis of available information or evidence.”

This means:

If you fail to present:

• transfer pricing documentation
• comparability analysis
• justification for deviation from market conditions
• contracts
• accounting documents

the NRA may determine the “market” price itself.

According to Art. 116, para. 5:

“When applying the methods for determining market prices, the revenue authorities shall also use data on stock exchange prices, data contained in statistical yearbooks or other publications containing specialised pricing information…”

This includes use of:

• external databases
• statistical references
• international sources
• public registers
• data from other administrations

The practical result is often an increase in recognised income or a reduction of deductible expenses.

In US terminology, this resembles IRS Section 482 adjustments. In the UK, similar adjustments arise under transfer pricing rules where documentation is insufficient.

3. Audit in Special Cases – Art. 122

This is the most serious consequence of non-cooperation.

Under Art. 122, para. 1, the revenue authority may apply the statutory tax rate to a tax base determined by it when:

• “no accounting records are kept or presented” (item 4)
• “documents necessary for establishing the tax base are missing or damaged” (item 5)
• “the audited person does not provide access… to accounting and/or commercial data stored electronically” (item 8)
• “there are data indicating concealed income” (item 2)

At this point, the NRA no longer relies on your accounting data.

Under Art. 122, para. 2, the authority may use:

• bank movements
• market value of assets
• rental price of premises
• number of employees
• turnover
• contracts
• differences between materials purchased and produced
• living expenses
• comparison with similar businesses
• other evidence

This is the so-called indirect determination of the tax base.

In comparative perspective, this resembles:

• the IRS net worth method
• the bank deposits method
• HMRC’s indirect profit reconstruction

However, Bulgarian law explicitly codifies this mechanism in Art. 122, giving broad reconstruction powers.

What Does This Mean for the Amount of Tax?

When a taxpayer fails to cooperate, the tax authority may determine the tax base independently.

What is the tax base?

The tax base is the amount on which tax is calculated.

The formula is:

Tax Base × Tax Rate = Tax Due

If documents are missing:

• expenses may not be recognised
• income may be increased through indirect methods
• discrepancies between assets and income may be treated as taxable

Corporate Tax (Corporate Income Tax Act)

The tax base is taxable profit.

If you fail to substantiate an expense of BGN 150,000:

• the expense will not be recognised
• profit increases by BGN 150,000
• at a 10% tax rate, this results in BGN 15,000 additional tax
• statutory interest accrues

Individuals (Personal Income Tax)

Under Art. 123:

“It shall be presumed, until proven otherwise, that there is taxable profit or income…”

If your assets or expenses substantially exceed declared income, the difference may be treated as taxable income.

If the discrepancy is BGN 300,000:

• 10% tax = BGN 30,000
• plus interest
• possible penalties

This resembles unexplained wealth assessments used by HMRC and lifestyle audits conducted by the IRS.

VAT

The tax base is the value of the supply.

If delivery documentation is missing:

• additional output VAT may be assessed
• input VAT credit may be denied
• under certain violations, Art. 186 may apply — sealing of premises

Comparable to UK VAT assessments and denial of input tax, or IRS disallowance of credits.

Additional Risks – Sanctions and Coercive Measures

Beyond increased tax liability, there are additional risks:

• administrative fines
• pecuniary sanctions for legal entities
• seizure of documents
• assistance from police authorities
• sealing of premises for fiscal violations

In cases of systematic obstruction, criminal liability may even arise.

Failure to respond to an NRA request almost always results in loss of control over evidentiary development. When documents do not come from you, the administration will construct the tax base according to its own methods — often less favourable.

Faulty Practices of the NRA Recognised by the Supreme Courts ⚖️

Bulgarian judicial practice is categorical that the powers of the National Revenue Agency are broad but not unlimited.

The Supreme Administrative Court has repeatedly annulled audit acts due to substantial procedural violations contradicting the principles of legality, objectivity, and official initiative enshrined in Art. 2, Art. 3, and Art. 5 of the Code.

Violations of the Principle of Objectivity

In Decision No. 5873 of 14 May 2021 in administrative case No. 184/2021 of the Supreme Administrative Court, the court held that mechanically transferring average daily turnover from one period to another violated Art. 3 and Art. 5 because the authority failed to establish actual facts.

In Decision No. 12627 of 1 October 2013 in administrative case No. 1685/2013 of the Supreme Administrative Court, it was held that referring to findings from a previous audit without new evidence gathering violates objectivity and good faith.

In Decision No. 14265 of 30 October 2013 in administrative case No. 1605/2013, failure to request relevant accounting documents was found to breach Art. 5.

In Decision No. 10850 of 9 November 2023 in administrative case No. 6432/2023, the Court emphasised strict adherence to objectivity principles.

These cases resemble US and UK judicial scrutiny of arbitrary assessments, where courts require factual substantiation rather than presumptive calculations.

Improper Service and Procedural Invalidity 📩

In Decision No. 4748 of 14 April 2021 in administrative case No. 13484/2020, the Supreme Administrative Court held that failure to properly serve the audit assignment order leads to nullity of the audit act.

In Decision No. 2314 of 6 March 2023 in administrative case No. 6554/2022, lack of proper notification meant the appeal period had not begun.

Procedural service defects in Bulgaria can invalidate the entire proceeding — a stricter consequence than often seen in IRS practice.

Exceeding Competence

In Interpretative Decision No. 6 of 27 October 2022 in interpretative case No. 6/2021, the Supreme Administrative Court emphasised that revenue authorities act only within expressly granted competence.

In Decision No. 9033 of 11 July 2017 in administrative case No. 2858/2017, inconsistent assessment of identical facts within the same audit was held unlawful.

Do You Need a Tax Lawyer or Is an Accountant Enough? 🤔

An accountant plays a crucial role in maintaining proper documentation and preparing accounting data. They assist with document provision and explanations.

However, an accountant is not a procedural representative and usually lacks deep expertise in administrative litigation.

When:

• Art. 122 is at risk
• concealed income is alleged
• security measures are imposed
• a high-value audit act is expected
• there is dispute over evidence or legal qualification

this is no longer purely an accounting issue — it is a legal dispute.

A good tax lawyer:

• analyses compliance with Art. 109 time limits
• verifies competence of the authority
• monitors procedural service
• attacks evidentiary defects
• builds strategy from the inspection stage

⚠️ In practice, we frequently see cases where accountants cooperated in good faith but without legal strategy, allowing authorities to construct an unfavourable evidentiary narrative.

Cooperation between accountants and lawyers is essential. Judicial practice shows procedural violations can lead to annulment — but only if properly identified and timely invoked.

Therefore, in serious inspections or audits, the tax lawyer’s role is strategic 🛡️ — protecting not just accounting figures, but rights, procedural guarantees, and economic security.