5 Bookkeeping Mistakes That Can Trigger a Tax Audit

VID's risk-based audit selection algorithm does not pick companies at random. It scans for patterns — specific discrepancies and anomalies in submitted data that statistically correlate with underreported income or overclaimed deductions. In 2025, VID conducted over 4,000 desk audits and approximately 800 field audits. The companies selected shared recognizable traits, and most of those traits trace back to bookkeeping failures, not deliberate tax schemes.

Here are the five mistakes that put you on VID's radar — and how to avoid each one.

Mistake 1: Expenses That Don't Match Revenue

VID's systems flag companies where reported expenses consistently approach or exceed reported revenue, especially when the business appears to be operating normally (paying salaries, maintaining an office, serving clients).

A marketing agency reporting EUR 120,000 in revenue and EUR 118,000 in expenses year after year will attract scrutiny. So will sudden spikes in expenses without a corresponding revenue increase — say, EUR 40,000 in "consulting services" appearing in Q4 when your typical quarterly spend is EUR 5,000.

The fix is not to suppress legitimate expenses. It is to ensure that every expense is properly documented with a valid invoice, clearly tied to a business purpose, and classified correctly. When VID asks (and they will), you need to produce the invoice, explain the business connection, and show that the expense was real.

One pattern we see repeatedly: business owners pay for personal expenses through the company — home renovations, family vacations, personal electronics — and classify them as business costs. This does not reduce taxes. It creates a deemed dividend distribution, triggers CIT at 20/80, and if VID catches it, adds penalties of 20-30% on top.

Mistake 2: PVN Discrepancies Between You and Your Counterparties

Every PVN declaration you file is cross-referenced against the declarations filed by your suppliers and customers. If you claim EUR 5,000 in input PVN from Supplier X, but Supplier X did not report a corresponding output PVN transaction with your company, VID sees a mismatch. Enough mismatches, and you get a letter.

Common causes:

• Your supplier invoiced in a different period than you recorded the purchase
• The supplier is behind on their PVN filings
• You claimed PVN from a company that is not PVN-registered
• Invoice details (amounts, dates) don't match between buyer and seller

This is fundamentally a bookkeeping discipline issue. Every PVN-bearing invoice you receive should be verified: is the supplier actually PVN-registered? (Check the EU VIES database.) Does the invoice contain all mandatory elements? Does the amount match what you're entering in your books?

In our experience, the most dangerous version of this mistake is claiming input PVN from companies that turn out to be shell entities or "missing traders." Even if you acted in good faith, VID can deny the deduction and demand repayment plus interest. The case law is clear: the buyer bears the burden of verifying their suppliers.

Mistake 3: Late or Missing Payroll Declarations

Payroll reporting in Latvia follows a strict monthly cycle. Employee income tax (IIN) and social contributions (VSAOI) must be declared and paid by the 23rd of the following month. The annual informative declaration reconciling all employee earnings is due by February 1.

Missing these deadlines triggers automatic penalties. But the bigger issue is inconsistency. If you report three employees in January, two in February, three again in March, and then zero in April, VID notices the pattern. It suggests either unreported cash payments to employees or informal labor — both of which are high-priority enforcement areas.

A client came to us after VID questioned why his construction company had EUR 400,000 in revenue but only one declared employee. The answer was obvious to VID: subcontractors being paid as employees without proper documentation. The resulting assessment included back-taxes, social contributions, and penalties totaling EUR 47,000.

Keep payroll declarations current. If employees come and go, document the transitions properly. And never, under any circumstances, pay "envelope salaries" (aplokšņu algas) — the practice is illegal, and VID has grown increasingly sophisticated at detecting it.

Mistake 4: Cash Transactions Without Proper Documentation

Cash is VID's blind spot — which is precisely why they scrutinize it heavily.

Any business that accepts cash payments from consumers must use a VID-registered cash register (kases aparāts). Each transaction must be recorded, daily Z-reports must be generated, and the totals must reconcile with your accounting records. Operating without a cash register, or with a non-functioning one, carries fines starting at EUR 140 for the first violation and escalating to EUR 350 or more for repeat offenses.

But the documentation problem goes beyond cash registers. If your company makes cash expenditures — paying a supplier in cash, for instance — you need a receipt or invoice from the supplier and a cash disbursement document in your own records. A notation saying "paid cash EUR 200 for supplies" without a supplier receipt is not sufficient.

The most dangerous scenario: large cash withdrawals from the company bank account without corresponding documentation. VID treats unexplained cash withdrawals as potential hidden distributions — taxable at the 20/80 CIT rate, plus penalties. A EUR 10,000 unexplained withdrawal could cost you EUR 2,500 in CIT plus 20-30% in penalties.

Mistake 5: Inconsistent or Missing Primary Documents

This is the foundational error that enables all the others. Primary documents — invoices, receipts, contracts, bank statements, delivery notes — are the raw material of bookkeeping. Without them, your numbers are assertions, not facts.

VID auditors work backwards from your declarations to your documents. They pick a sample of reported transactions and ask to see the originals. If you can't produce the invoice for a EUR 3,000 expense you deducted, the deduction is reversed. If you can't produce invoices for enough expenses, VID may conclude your entire cost base is unreliable and apply an estimated assessment — which is never in your favor.

The retention requirement is five years from the end of the financial year. That means records from 2021 must still be accessible in 2026. Digital storage is permitted (and encouraged), but the files must be readable and unaltered.

One detail that trips up businesses moving to digital: scanned copies are acceptable, but you must ensure the scan is legible and includes all pages. A blurry photo of a crumpled receipt taken on a phone at 11 PM does not constitute proper documentation — even if the original is long gone.

Set up a system. Scan or photograph every document on the day you receive it. Store it in a structured folder system. Match it to the corresponding entry in your accounting software. This takes minutes per day and saves hours (and euros) during an audit.

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Recognize Any of These Mistakes?

If any of these errors sound familiar, a professional review now costs far less than a VID audit correction later. We examine existing books, identify discrepancies, fix historical entries, and put systems in place so the same mistakes do not recur.

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