Not only personal income tax under Supreme Audit Office’s scrutiny

Among other things, the Supreme Audit Office looked into the tax administrators’ procedures and assessed the overall effectiveness, purpose and efficiency of personal income tax administration. The system itself has come under major criticism, with auditors pointing to the lack of transparency and the overall complexity owing to a large number of exceptions.

The SAO also identified deficiencies in handling electronic submissions. In 24% of the cases, submissions were rejected for reasons that did not obstruct the proper determination and assessment of tax but mostly involved only formal deficiencies. In more than 5% of the cases under review, the tax authority unlawfully imposed a penalty for the failure to file an income tax return without calling on the taxpayer to remove submission deficiencies. The SAO also pointed out that tax administrators did not sufficiently examine whether conditions for claiming deductions and tax credits had been met, primarily owing to the administrators’ inability to check – on an automatic basis – the eligibility of deductions, i.e. whether conditions for claiming deductions had been fulfilled. Since 2016, the tax administration system has been using the central records of dependent children to improve the administration of personal income tax. The financial administration has recently also discussed possible cooperation and information exchange with the Czech Insurance Association and the Czech Social Security Administration.

The Supreme Audit Office also views as a shortcoming that the financial administration does not have at its disposal information about individuals subject to personal income tax on employment, not allowing for a better focus of its inspection activities on risk areas. In 2013 – 2015, a total of  21 408 inspections focusing on personal income tax returns were carried out and CZK 663 million was additionally assessed. A total of 12 989 inspections were carried out in respect of personal income tax on employment and CZK 250 million was additionally assessed. On average per an entity under review, CZK 19 thousand was additionally assessed with respect to personal income tax on employment and CZK 31 thousand with respect to individuals filing personal income tax returns.

The administration of personal income tax was found to be relatively efficient. Whereas expenses of CZK 1 for the administration of all tax account for an income of CZK 73 from all taxes, approx. CZK 156 is generated from personal income tax. According to the SAO, the efficiency is significantly higher owing to the transfer of the major part of tax administration responsibilities to payers – employers who, according to the SAO, bear expenses of CZK 948.5 million a year associated with personal income tax administration. 

The financial administration’s response to the SAO’s report was quick. The Ministry of Finance agreed with the SAO that the personal income tax system is too complex and lacks transparency and offered a cure in form of a new Income Tax Act, currently in preparation. The ministry promises a simpler law that will be more resistant to frequent introductions of tax exceptions. The ministry also stood behind their officials who have made errors. According to the ministry, human failures identified by the SAO “can be rectified via appeals against penalty decisions”. However, the question lingers how many of these errors remain unrectified.

The financial administration also points out that it continues to work on the MOJE daně (My Taxes) project, aiming to simplify tax administration, where MO stands for modern and JE for jednoduché, i.e. simple. The new electronic system and portal puts a lot of trust in modern information technologies. Hopefully, the selected technological solution will indeed be modern and will remain so. Alas, the T602 programme used for the current ADIS information system was also top-of-the line in the nineties of the last century.