Duty to call for additional tax returns not absolute
The Supreme Administrative Court (the SAC) recently had to decide under what circumstances the tax administrator is obligated to call upon taxpayers to file an additional tax return before commencing a tax inspection.
In this particular case, the Police of the CR identified a large number of invoices that had been issued but had not been recorded in the taxpayer’s accounts. This resulted in a decrease in the taxpayer’s tax base for several taxable periods. After receiving this information, the tax administrator commenced a tax inspection of one of the taxable periods at issue without informing the taxpayer in advance that an additional income tax return should be filed. And this omission was the subject of the taxpayer’s appeal against the tax administrator’s procedure, claiming this to be at variance with the Tax Procedure Rules.
The extended panel of the SAC judges held that in compliance with the basic principle of tax administration, which is to accurately ascertain and determine tax, it is the taxpayer who should rectify the incorrect amount of tax. The tax administrator’s duty is to respect taxpayers’ rights and interests. They should therefore be given a chance to increase their tax liability without incurring any penalties. The extended panel of judges also held that the tax administrators should indeed call on the taxpayer to file an additional income tax return where the tax administrator has ascertained facts indicating a higher tax liability, but only where these facts have been ascertained outside the scope of a tax inspection (i.e. within an on-site investigation). Yet, the tax administrator exceptionally does not have the duty to call for the submission of an additional income tax return in circumstances specified by the SAC, for example, where facts ascertained by the tax administrator suggest fraud or where the tax administrator not only examines but also determines a tax liability within a tax inspection of a larger scope.
The SAC’s first panel of judges elaborated that the tax administrator may issue a call to the taxpayer only if it can be justly assumed based on available facts that additional tax will be assessed and if the reasons for the additional tax assessment are properly specified in the call. In other words, the tax administrators must have sufficiently clear information about the reasons for assessing additional tax so that they can specify them in their call. The court decisions and related implications are highly likely to be further discussed by the professional public. The SAC also stated that an additional income tax return may also be filed after the taxpayer learns that the tax administrator is planning to commence a tax inspection. And this should indicate to the taxpayer that not all is lost once the tax administration discloses its intentions.