KYC in Tax Matters: Special Considerations
KYC in Tax Matters: Special Considerations
"But I'm just doing their tax return?" The question comes from a bookkeeper who just got a new client with "slightly complicated tax affairs" and a pile of cash receipts. Unfortunately, the answer isn't as simple as many think.
When you advise on taxes, you enter a minefield where KYC requirements become extra important - and the consequences of mistakes extra serious.
Why Tax Area is Special
Tax evasion and money laundering are closely connected. Black money must eventually be explained to tax authorities, and this is often where criminals seek "creative" help. As a tax advisor, you're therefore in a particularly exposed position.
Authorities know this. Therefore, their focus on tax advisors specifically is heightened, and tolerance for "I didn't know" is non-existent.
Red Flags in Tax Cases
Cash-Intensive Businesses
Scenario: Restaurant with primarily cash sales wants help with "tax optimization" KYC response: Thorough review of revenue vs. industry norms. Documentation of money's origin.
International Structures
Scenario: Danish company with subsidiary in low-tax country without real activity KYC response: Understand business rationale. Is it real structure or pure tax avoidance?
Private vs. Business Consumption
Scenario: Self-employed with remarkably low private consumption and high business expenses KYC response: Assess realism. Can person live on 5,000 DKK/month?
Sudden Wealth Changes
Scenario: Client has "inherited" or "won" larger amounts without documentation KYC response: Demand documentation. No papers = no advice.
Extended KYC for Tax Optimization
Standard KYC isn't enough when client asks for "creative tax optimization":
1. Understand Full Economy
- Not just company numbers
- Also private economy and wealth
- Connection between income and consumption
2. Document Advisory
- Exactly what did you advise on?
- What reservations did you make?
- What did you warn against?
3. Assess Tax Substance
- Is there real business activity?
- Or just paper constructions?
- Would arrangement make sense without tax benefit?
The Difficult Balance
As tax advisor, you must balance between:
- Client's wish for minimal tax (legally)
- Authorities' compliance demands
- Your own risk of aiding tax evasion
Rule of thumb: If a construction only makes sense tax-wise - it's probably problematic.
Practical KYC Procedures for Tax Advisors
With New Client
- Thorough Economic Screening
- 3 years financial statements/tax returns
- Bank statements to verify money flows
- Previous auditor statements
- Industry Comparison
- Are numbers within normal ranges?
- Large deviations need explanation
- Ownership Structure
- Full mapping of group
- Identify ultimate beneficial owners
- Understand why structure is as it is
Ongoing Monitoring
- Quarterly review of larger clients
- Annual update of all tax clients' affairs
- Immediate reassessment at:
- Wish for new company structures
- Larger unexplained money flows
- Request for controversial advice
When to Say No
Some situations require clear no:
"Can you help make the money disappear?" Obvious request for tax evasion. Refuse and document.
"I have some expenses without receipts..." Without documentation, no deduction. Period.
"My cousin in Dubai can invoice consulting services" Fictitious invoices = aiding fraud. Drop client.
"Can't we just...?" If sentence starts like this, answer is often no.
Documentation That Holds in Court
For tax cases, documentation requirement is extra important:
- Save all correspondence - including informal emails
- Meeting minutes - especially when you warn against something
- Client instructions - written when they insist
- Your reservations - always written when you disagree
Remember: If tax authorities come after client, they'll probably come after you too.
Cooperation with Authorities
In tax cases, you can be caught between confidentiality and reporting duty:
Main rule: Confidentiality applies, but... Exception: At suspicion of money laundering/tax evasion, you must report Dilemma: Report must not be revealed to client
Solution: When in doubt, contact bar association or trade organization for guidance.
Digital Transformation of Tax KYC
Modern tools make tax KYC easier:
- Automatic benchmark against industry metrics
- AI screening for unusual patterns
- Integration with tax authority systems
- Audit trails for all advice
Invest in technology - it pays off when inspection comes.
Conclusion: Be the Good Advisor
Good tax advice is about optimizing within law's framework. KYC helps you:
- Identify clients who want to cross the line
- Protect yourself from aiding liability
- Build healthy practice on solid foundation
Yes, it means you lose some "exciting" clients. But you also sleep better at night.
Because in tax world, the shortest route between two points is rarely the safest. And as advisor, it's your job to know the difference.
