How to present evidence in tax proceedings, or: less is sometimes more
Many of you have no doubt encountered a request for evidence during a tax inspection. However, being overzealous in providing evidence may not always pay off. What specific evidence a taxpayer is required to produce at each stage of a tax inspection is closely related to the issue of the distribution of the burden of proof, which we discussed in our previous issue of the Tax and Legal Update.
The transfer of the burden of proof and the taxpayer’s specific obligations in submitting evidence are not regulated in detail in the general tax regulations. However, the specifics are all the more often the subject matter of review by administrative courts, with the Supreme Administrative Court producing extensive case law on this issue. The general rule is that everyone has the burden of proving the facts they assert in their tax return, most often by submitting tax documents, bank statements, accounting records, photographs, and witness statements, while the choice of the specific evidence always depends on the asserted facts.
Although the tax administrator is obliged to ascertain all relevant facts to determine the tax liability while not being limited to the taxpayer’s proposals, the tax procedure itself is not governed by the inquisitorial principle. Therefore, the tax authority will not purposely seek evidence in your favour and prove the correctness of the claim made in the tax return. The tax authority's duties therefore normally end with a call to prove the facts.
If you manage to present comprehensive evidence to support your assertions, it is then up to the tax authority to credibly challenge this evidence as part of the transfer of the burden of proof, e.g., by requesting further evidence. However, generally, the provision of evidence in its first phase should primarily involve the provision of documents. Only after the tax authority has sufficiently challenged these should witness statements and photographic documentation come into play.
The tax administrator is not entitled to request documents on all transactions, but only those that are being challenged in a specific way, i.e., the request must be quite specific. Only evidence directly relating to the disputed facts should then be submitted, all the while carefully considering the scope of such evidence. Anything you say can be used against you, which we know from American films, also applies in tax proceedings. Any evidence you present to the tax authorities may prove problematic for you at later stages of the tax inspection. Moreover, tax proceedings are a long process, and it is not wise to play all the cards you have up your sleeve at the very beginning. It is often only during the tax inspection that you come to know what the tax authority’s intentions are and on what grounds the tax liability is additionally assessed, and you should react accordingly.
However, it is definitely not appropriate not to respond to the tax authority's request at all. Even though less may indeed be more in this case, doing nothing is not the right choice: if you do not respond, there is a risk of failure in the tax inspection and, in the most extreme case, even of an additional assessment of tax by the tax administrator using whatever information and materials available.