Serious weaknesses in the way the tax department carries out value added tax audits have exposed the state to potential revenue losses, with years-long delays, inadequate investigations and millions of euros in VAT refunds paid without sufficient verification, according to a special report published by the audit office on Thursday.

The report calls for a major overhaul of the VAT audit system, recommending an annual audit programme based on documented risk criteria, more onsite inspections and stronger cooperation between authorities to improve tax compliance and protect public finances.

The audit office said its review of a random sample of VAT files uncovered significant shortcomings in the tax department’s audit procedures and compliance with both VAT and income tax legislation.

Among the main problems identified were delays of several years before substantive audits were carried out, an overreliance on desk-based reviews, inadequate documentation to support tax decisions and uncertainty over the tax treatment of complex transactions, including trade with European single market and gold trading.

According to the report, these weaknesses resulted in substantial VAT refunds being paid without adequate verification, while in other cases, the six-year statutory limitation period expired before taxes could be assessed, increasing the risk of lost state revenue.

Auditors also found discrepancies between VAT and income tax declarations, failures to submit financial statements and cases in which no action was taken against professionals who submitted inaccurate tax returns.

The report concludes that the current system for selecting audit cases, monitoring VAT refunds and cross-checking taxpayer information does not provide sufficient safeguards to protect public revenue.

Among the cases highlighted was a company trading in investment and refined gold, which received around €38 million in VAT refunds between 2010 and 2024 despite not undergoing an on-site inspection for ten years.

Auditors also pointed to conflicting interpretations within the tax department over the VAT treatment of investment gold and recommended closer cooperation with the central bank to clarify whether the company’s activities complied with the law.

In another case, a consultancy company received almost €696,000 in VAT refunds following desk-based reviews alone while accumulating tax losses of €31.2 million. The audit office said the repeated correction requests and mounting losses should have prompted a more comprehensive investigation.

The report also refers to other cases involving delayed audits, discrepancies between VAT and income tax declarations, failures to investigate potential professional misconduct and possible abuse of VAT rules governing temporary imports of yachts, which auditors said pointed to broader systemic weaknesses in the tax department’s audit procedures.

Despite the findings, auditor-general Andreas Papaconstantinou praised the early performance of the newly established nationwide VAT audit unit, describing its creation as a step in the right direction.

The specialist unit, which began operating in 2024, carried out 175 audits, with 112 resulting in tax assessments totalling around €10 million.

By comparison, the tax department conducted 3,609 VAT audits nationwide during the same year, resulting in approximately €30 million in VAT assessments.

This means the specialist unit carried out just five per cent of all VAT audits but accounted for one-third of the total VAT assessed, despite examining only 0.067 per cent of the 261,077 VAT-registered taxpayers.

Papaconstantinou said the effectiveness of the audit system should not be judged solely by the amount of tax collected, arguing that audit resources should instead be allocated according to documented risk assessments covering the full spectrum of economic activity.

The report nevertheless found that the specialist unit’s work focused mainly on the construction and consultancy sectors without documented justification for selecting those industries. It also operates without an annual audit programme and is regularly assigned unrelated duties, reducing the time available for specialist VAT investigations.

The audit office recommended introducing a structured annual audit programme, expanding onsite inspections, strengthening cooperation with the central bank and other authorities, improving data-sharing between government systems and issuing uniform guidance to ensure tax legislation is applied consistently.

It also called for a targeted review of high-risk cases involving cross-border transactions and significant discrepancies between VAT and income tax declarations, saying the measures are necessary to strengthen tax enforcement and better protect public finances.