SAC: additional tax may be assessed even if tax inspection is unlawful

Less than three month ago, we informed you about recent case law in which the Supreme Administrative Court (SAC) confirmed that tax administrator had proceeded unlawfully by not giving the taxpayer the chance to correct their error by filing an additional tax return, and instead initiating a tax inspection. The tax inspection thus initiated was found to have been unlawful and the SAC prohibited its continuation. In its judgment of October of this year (6 Afs 61/2018), the SAC opined in more detail on whether the unlawful initiation of a tax inspection automatically renders the subsequently issued notices on tax assessment unlawful.

The SAC has repeatedly confirmed that if a tax administrator becomes aware, otherwise than by a tax inspection of the period in question, that tax should have been assessed in a different amount than given in the filed tax return, then the tax administrator first has to call upon the taxpayer to file an additional tax return. Only if a taxpayer does not respond to the call, it is appropriate to initiate a tax inspection. Unlike an additional tax return, a tax inspection involves a penalty of 20% of the additionally assessed tax.

In its recent judgement, the SAC dealt with the question whether an unlawfully initiated and continued tax inspection always results in the unlawfulness of tax assessment notices issued based on such an inspection. According to the SAC, it is necessary to consider on a case by case basis whether the tax administrator’s procedural error might have had an effect on the result of the tax proceedings unfavourable for the taxpayer. If a tax inspection was initiated in a situation where the taxpayer should have been first invited to file an additional tax return, the tax administrator infringed on the taxpayer’s right by assessing the penalty.

In the case in question, however, the SAC concluded that there was no direct link between not calling upon the taxpayer to file an additional tax return, and assessing the penalty. The truth was that throughout the tax proceedings the taxpayer had argued against the reasons for assessing additional tax, therefore is was likely that the taxpayer would not have followed the call to file an additional tax return anyway. This means that, for this specific taxpayer, the tax inspection would most likely have been initiated and the penalty would have been assessed even if the tax administrator had proceeded lawfully and issued the call. The SAC hence did not find the tax assessment notices to have been unlawful.

The SAC’s standpoint indicates that a failure to call upon taxpayers to file an additional tax return does not always affect the lawfulness of subsequently issued tax assessment notices. We therefore recommend that taxpayers actively defend themselves against the tax administrator’s procedure immediately after a tax inspection is initiated – at that point, according to the SAC constant case law, it should be possible to have the tax inspection discontinued on the grounds of it being an unlawful infringement.

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