How to avoid assessment of tax using auxiliary mechanisms?

When can the tax administrator determine tax using auxiliary mechanisms?

Auxiliary mechanisms can be used if the two following conditions are met:

• The taxpayer fails to meet their obligations in proving the asserted facts.
• The tax cannot be assessed on the basis of evidence.

This means, e.g., that the taxpayer has failed to prove their tax assertions, failed to file a tax return, or failed to provide the tax administrator with cooperation in the fact-finding phase of the proceedings. The tax administrator may also use auxiliary mechanisms where the taxpayer fails to comply with the legal obligation to keep proper accounting records. Such failures on the part of the taxpayer may result in the tax authority not having a basis for assessing the tax based on evidence, even though that is the preferred option for the assessment of tax. The tax authority must therefore justify why the tax could not be assessed that way.

Which auxiliary mechanisms can the tax administrator use?

• Comparison of comparable taxpayers and their tax obligations. The data of other taxpayers should be the main basis for determining the tax when using auxiliary mechanisms. The tax administrator shall consider similar cases while taking into account the specifics of the taxpayer (e.g. differences in turnover, number of employees, amount of assets, etc.).
• Evidence not challenged by the tax administrator. This is evidence that has either already been submitted by the taxpayer or is available to the tax administrator from the tax inspection. The tax administrator shall take them into account in relation to the scope of the taxpayer's activity.
• Explanations given. These are explanations under Section 79 of the Tax Procedure Code, which cannot be used as means of evidence but can be used as an auxiliary mechanism. However, the tax administrator should still treat the explanations with caution because they may not be true.
• The tax administrator's own knowledge and information acquired during tax administration. This may be, e.g., available statistical data or information on usual margins.

The tax administrator therefore in fact estimates the actual tax liability, e.g., based on the taxpayer's past economic results or the economic results of similar taxable entities.

What are the implications for the taxpayer?

Although the tax administrator is obliged to consider any advantages that may arise for the taxpayer from the established facts, auxiliary mechanisms may indeed have negative implications for the taxpayer. As these mechanisms are used to only estimate the tax liability, they can often lead to a higher tax being assessed than would have been calculated if the taxpayer had provided evidence and other assistance to the tax authority.

Practical tips on how to avoid tax assessment using auxiliary mechanisms

1. Comply with your statutory obligations. This includes the timely filing of complete tax returns and proper bookkeeping. You must also always thoroughly document and prove to the tax administrator all facts that affect the tax assessment and that the taxpayer asserts.
2. Communicate, communicate, communicate. The taxpayer should actively communicate with the tax administrator and provide requested information and explanations. It is better to proactively address any ambiguities or issues than to wait for the tax administrator's assessment.
3. Put the issue in the hands of professionals. Lawyers or tax advisors can guide taxpayers through tax proceedings from start to finish and help them respond appropriately and in a timely manner.