Analysis of Tax Risks in the Lawyer Industry: 2024 Audit Cases and Compliance Implications

With the continuous advancement of the rule of law in taxation, the tax authorities continue to strengthen the tax supervision of all walks of life, and law firms, as professional service institutions, are no exception. The 10 tax audit cases of the lawyer industry exposed in 2024 not only reveal the loopholes in the tax management of law firms, but also reflect the tax risks faced by the entire industry. Through the analysis of these cases, combined with tax risk points, this article aims to provide enlightenment and suggestions for the legal profession on tax compliance.

First of all, the issue of invoice illegality has been mentioned in a number of cases, such as a law firm in Beijing and a law firm in Beijing (Shanghai), which reflect the obvious irregularities in the management of invoices. Obtaining false invoices or issuing false invoices, as well as the payment of wages, bonuses and commissions in the form of invoice reimbursement, etc., seriously violates the provisions of the tax law and increases the tax risk.

Secondly, concealment of income and incorrect declaration of income are also common tax risk points. For example, concealing income through cash, private accounts, etc., linking income to and from non-filing and tax returns, and charging desk fees, printing fees and other behaviors that do not recognize income will lead to law firms facing tax penalties. These behaviors not only affect tax collection and management, but also undermine a fair market competition environment.

In addition, the pre-tax deduction of case-handling expenses does not comply with the regulations, the accounting is chaotic, and the account books, accounting vouchers and relevant materials are not kept in accordance with the regulations, which are also common tax risk points in the lawyer industry. These non-standard operations disrupt the normal order of tax administration and increase the risk of tax compliance.

In addition, the distribution income and the income (profits) retained in the current year are not declared for individual income tax, the business income is confused with the income from wages and salaries, and the tax law is not understood, resulting in under-declaration and tax payment, which reflects the deficiencies of law firms in individual income tax declarations. As legal professionals, lawyers should strengthen their study of tax law to ensure the accuracy and legitimacy of tax declarations.

Finally, luck is one of the important factors that lead to tax risks. As a lawyer, a lawyer should establish a correct concept of tax law, abide by the provisions of the tax law, and avoid tax violations caused by luck.

To sum up, the 2024 tax audit cases in the lawyer industry have sounded the alarm bell for us, reminding law firms that they must strengthen tax compliance management. The law firm is required to establish and improve the internal tax management system, standardize the management of invoices, correctly declare income, reasonably list expenses, pay taxes in accordance with the law, and avoid tax risks. At the same time, the tax authorities should also strengthen the supervision of tax violations and promote the healthy and orderly development of the lawyer industry.

10 cases of law firms being audited for tax purposes in 2024

1. Illegal invoices of ** law firm in Beijing (Jing Shui Ji Yi Penalty [2024] No. 2)

On January 4, 2024, the First Inspection Bureau of the Beijing Municipal Taxation Bureau of the State Administration of Taxation confirmed that Beijing ** Law Firm did not list or underlisted income in the account books, which was characterized as illegal invoices, and imposed a fine of RMB 1,169,752.74.

2. Beijing ** (Weifang) Law Firm evades tax payment (Weifang Tax Audit No. 1 [2024] No. 1)

On January 29, 2024, the First Inspection Bureau of the Weifang Municipal Taxation Bureau of the State Administration of Taxation found that Beijing ** (Weifang) Law Firm subsidized 12 lawyers in 2021 by reimbursing vehicle leasing fees and refueling fees, with an amount of 233,477.10 yuan, and in 2022, 11 lawyers were subsidized by reimbursing vehicle leasing fees and refueling fees, with an amount of 223,376.81 yuan. $507.69 and a fine of $6,253.85.

3. Jiangsu ** Law Firm Evasion of Tax Payment (Tin Tax No. 15 [2024] No. 15)

On February 1, 2024, the First Inspection Bureau of the Wuxi Municipal Taxation Bureau of the State Administration of Taxation found that Jiangsu ** Law Firm failed to withhold and pay individual income tax in accordance with the provisions of laws and administrative regulations, and underpaid the individual income tax of 768,800 yuan in 2017~2022, and actively assisted the tax authorities in recovering taxes during the inspection process, and imposed a fine of 384,400 yuan for 50% of the undeducted individual income tax of 768,800 yuan.

4. Beijing ** (Harbin) Law Firm Fails to Perform Withholding Obligations (Harbin Tax Penalty [2024] No. 6)

On February 7, 2024, the Inspection Bureau of the Harbin Municipal Taxation Bureau of the State Administration of Taxation found that Beijing ** (Harbin) Law Firm did not perform its withholding and payment obligations, withheld the unwithheld tax, failed to pay or underpaid the tax that should be paid, and was ordered by the tax authorities to pay within the time limit, but failed to pay within the time limit, and imposed a fine of RMB 437,759.66.

5. Beijing ** (Yanji) Law Firm evaded tax payment (Yanzhou Tax Audit Penalty [2024] No. 6)

On February 23, 2024, the Inspection Bureau of the Yanbian Korean Autonomous Prefecture Taxation Bureau of the State Administration of Taxation confirmed that Beijing ** (Yanji) Law Firm underrecorded the income of 78,000.00 yuan (tax included) from the lawyer's management fee (workstation fee) collected from practicing lawyers in the account books in 2022, failed to file tax declarations, underpaid value-added tax and additional and individual income tax, and imposed a fine of RMB 8,689.99 0.5 times; At the same time, if there is an act of failing to keep the account books and accounting vouchers for 2020 and 2021 in accordance with the regulations (lost when moving), a fine of 500.00 yuan will be imposed.

6. Other violations of the law by Beijing ** (Wuhan) Law Firm (Wu Shui Er Ji Zhi [2024] No. 122)

On April 2, 2024, the Second Inspection Bureau of the Wuhan Municipal Taxation Bureau of the State Administration of Taxation confirmed that Beijing ** (Wuhan) Law Firm collected a total of 1,167,241.34 yuan in lawyer's desk fees (card seats) and 245,263.10 yuan in lawyer's printing fees in 2020~2022, and there was off-the-books concealment of other business income, and the value-added tax and additional 123,386.79 yuan should be paid, and a fine of 50% should be imposed on the corresponding value-added tax and urban maintenance and construction tax, a total of 58. 989.41 yuan.

7. Wuhan ** Property Management Co., Ltd. has illegal invoices (Wu Shui Yi Ji Penalty [2024] No. 49)

On April 9, 2024, the First Inspection Bureau of the Wuhan Municipal Taxation Bureau of the State Administration of Taxation verified that Wuhan ** Property Management Co., Ltd. issued 154 ordinary VAT invoices to 70 enterprises and individuals including Jiangsu *** Law Firm from December 2020 ~ April 2021 without real transactions, with a total invoice amount of 7,383,380.74 yuan, a tax amount of 18,883.04 yuan, and a total price and tax of 7,402,263.78 yuan. It is characterized as the false issuance of ordinary VAT invoices, and a fine of RMB 50,000 will be imposed on the false issuance of VAT invoices.

8. A law firm in Anhui (Heshui Ji Penalty (2024) No. 11)

On April 24, 2024, the penalty basis: according to the first paragraph of Article 63 of the Law of the People's Republic of China on the Administration of Tax Collection, "a taxpayer who forges, alters, conceals, or destroys account books and accounting vouchers without authorization, or overlists expenses or omits or understates income in the account books, or refuses to declare or makes false tax declarations after being notified by the tax authorities, and fails to pay or underpays the tax payable, is tax evasion." If a taxpayer evades taxes, the tax authorities shall recover the taxes not paid or underpaid, and impose a fine of not less than 50% but not more than five times the amount of taxes not paid or underpaid; where a crime is constituted, criminal responsibility is pursued in accordance with law. In view of the fact that your unit has paid value-added tax, urban maintenance and construction tax, individual income tax and other taxes and fees during the inspection period, the above-mentioned tax evasion of your unit shall be punished lightly, and a fine of 50 percent of the underpayment of value-added tax of 52,026.01 yuan and urban maintenance and construction tax of 3,641.82 yuan shall be imposed, that is, the fine amount is 27,833.92 yuan.

9. Xinjiang ** Law Firm (Wu Shui Ji Zhi [2024] No. 36)

On April 11, 2024, the Inspection Bureau of the Urumqi Municipal Taxation Bureau of the State Administration of Taxation confirmed that Xinjiang ** Law Firm received 1,072,726.00 yuan of unrecognized income from Xinjiang **** High Technology Co., Ltd. for legal services, underpaid value-added tax and surcharge, and individual income tax, which was characterized as tax evasion, and imposed a fine of 55,499.55 yuan of 50% of the underpayment of 110,999.08 yuan.

10. Beijing **** (Shanghai) Law Firm's invoice is illegal (Shanghai Shui Ji Yi Penalty [2024] No. 40)

On April 16, 2024, the First Inspection Bureau of the Shanghai Municipal Taxation Bureau of the State Administration of Taxation found that Beijing **** (Shanghai) Law Firm violated the invoice management regulations, causing other units or individuals to fail to pay, underpay or fraudulently obtain taxes, and imposed a fine of 50% of the tax that caused other individuals to underpay taxes, totaling 121,371.49 yuan.

There are the following common tax risks in the legal profession

(1) Obtaining false invoices or external false invoices

(2) Concealing income through cash, private accounts, or other means

(3) The income is linked to the current and does not declare and pay taxes

(4) Gifts that are not recognized as sales revenue

(5) Low-price sales and delivery benefits

(6) "Private car for public use" and other pre-tax expenditure vouchers are not compliant

(7) Accounting is chaotic, and the adjustment of final settlement is not in place

(8) Failing to keep account books, accounting vouchers and relevant materials in accordance with regulations

(9) Pay wages, bonuses and commissions in the form of invoice reimbursement

(10) The collection of desk fees, printing fees, etc., does not recognize income

(11) The pre-tax deduction of case-handling expenses does not comply with provisions

(12) Confusing business income with income from wages and salaries

(13) The income from distribution and the income (profits) retained in the current year have not been declared for individual income tax

(14) Failure to understand the provisions of the tax law resulting in under-declaration of taxes

(15) As a legal person, he often has a fluke mentality

Article source: Chaohe Taxation