The courts refer to a situation where the tax administrator (typically the tax office) carries out intensive control activities of a specific tax entity without officially initiating a tax audit as a hidden tax audit. A tax audit is properly initiated by delivery of a document called "Notice of Initiation of Tax Audit" to a data box, by registered letter (if you do not have a data box and are not legally required to have one) or at a meeting with the tax authority.
If the tax administrator checks the tax entity so intensively that it should have officially initiated a tax audit but fails to do so, this may have concrete negative consequences for the tax entity - for example, it may allow for a de facto longer examination period or it may allow the tax administrator to check the same facts repeatedly.
Fortunately, thanks to the case law and the publicity that this topic is receiving, it is gradually becoming less and less of a problem in current practice, as the tax authorities are starting to take notice of the very obvious cases. However, it cannot be said that hidden tax audits have completely disappeared.
On the one hand, we are still dealing with cases that started in the past, when the tax administrator's prudence in this area was at a much lower level, but even in new cases we still encounter a number of borderline situations where the tax administrator requires relatively extensive documentation, both concerning the tax subject itself and its suppliers or customers, before initiating its own tax audit.
In this context, it is particularly good to beware of situations where the tax authority pretends that it is not checking your own tax liability, but the tax liability of your supplier and your customer, and asks for complex documents relating to one complete transaction flow, e.g. of identical goods. It therefore wants all the documents relating to its acquisition and everything relating to its subsequent sale. Although in this case it may appear that the tax authority is only obtaining data relating to third parties (i.e. your supplier and your customer), it is also obtaining (whether intentionally or unintentionally) a very comprehensive picture of your own tax liability in relation to those transactions.
Similarly, in practice, it sometimes happens that the tax administrator, when/after initiating a tax audit, requests documents from the tax subject that do not correspond to the declared subject and scope of the tax audit.
The subject of the tax audit is a specific tax (corporate income tax, VAT, etc.) for a specific tax period, or in the case of taxes without a tax period, in relation to the individual taxable fact.
The scope of the tax audit is then a more detailed specification (focus) within this subject (for example, only specific selected taxable transactions). If the scope is not defined, or if it is defined as 'full', it is an audit of the entire tax liability for a specific tax period (all facts).
The subject matter and scope of the tax audit can be found in the "Notice of Initiation of Tax Audit" document. If the tax administrator starts requesting documents outside the stated subject and scope of the tax audit, this is again an indicator that the tax audit could be a hidden tax audit of a period other than the declared period and so on.
The negative effects of a hidden tax audit can also be defended in appeal proceedings and in court proceedings, but in terms of minimising them, it is only advisable to address these situations at the outset, ideally at the stage of submitting documents in the tax audit itself. Seeking early professional assistance can not only prevent negative tax consequences, but can sometimes help resolve a potential dispute with the tax administrator more quickly, without shifting the focus of the procedural defence to the appeal proceedings, which often drag on for several years, or to protracted proceedings before the administrative courts.
About the hidden tax check on my LinkedIn profile: HERE.
An interesting summary of the current situation with regard to hidden tax audits is also offered by an article in the weekly Ekonom: How far can the tax administrator go? It depends on the court's judgement | Ekonom.cz: Website of the weekly EKONOM
vaclav.cepelak@bdolegal.cz
If the tax administrator checks the tax entity so intensively that it should have officially initiated a tax audit but fails to do so, this may have concrete negative consequences for the tax entity - for example, it may allow for a de facto longer examination period or it may allow the tax administrator to check the same facts repeatedly.
Fortunately, thanks to the case law and the publicity that this topic is receiving, it is gradually becoming less and less of a problem in current practice, as the tax authorities are starting to take notice of the very obvious cases. However, it cannot be said that hidden tax audits have completely disappeared.
On the one hand, we are still dealing with cases that started in the past, when the tax administrator's prudence in this area was at a much lower level, but even in new cases we still encounter a number of borderline situations where the tax administrator requires relatively extensive documentation, both concerning the tax subject itself and its suppliers or customers, before initiating its own tax audit.
In this context, it is particularly good to beware of situations where the tax authority pretends that it is not checking your own tax liability, but the tax liability of your supplier and your customer, and asks for complex documents relating to one complete transaction flow, e.g. of identical goods. It therefore wants all the documents relating to its acquisition and everything relating to its subsequent sale. Although in this case it may appear that the tax authority is only obtaining data relating to third parties (i.e. your supplier and your customer), it is also obtaining (whether intentionally or unintentionally) a very comprehensive picture of your own tax liability in relation to those transactions.
Similarly, in practice, it sometimes happens that the tax administrator, when/after initiating a tax audit, requests documents from the tax subject that do not correspond to the declared subject and scope of the tax audit.
The subject of the tax audit is a specific tax (corporate income tax, VAT, etc.) for a specific tax period, or in the case of taxes without a tax period, in relation to the individual taxable fact.
The scope of the tax audit is then a more detailed specification (focus) within this subject (for example, only specific selected taxable transactions). If the scope is not defined, or if it is defined as 'full', it is an audit of the entire tax liability for a specific tax period (all facts).
The subject matter and scope of the tax audit can be found in the "Notice of Initiation of Tax Audit" document. If the tax administrator starts requesting documents outside the stated subject and scope of the tax audit, this is again an indicator that the tax audit could be a hidden tax audit of a period other than the declared period and so on.
The negative effects of a hidden tax audit can also be defended in appeal proceedings and in court proceedings, but in terms of minimising them, it is only advisable to address these situations at the outset, ideally at the stage of submitting documents in the tax audit itself. Seeking early professional assistance can not only prevent negative tax consequences, but can sometimes help resolve a potential dispute with the tax administrator more quickly, without shifting the focus of the procedural defence to the appeal proceedings, which often drag on for several years, or to protracted proceedings before the administrative courts.
About the hidden tax check on my LinkedIn profile: HERE.
An interesting summary of the current situation with regard to hidden tax audits is also offered by an article in the weekly Ekonom: How far can the tax administrator go? It depends on the court's judgement | Ekonom.cz: Website of the weekly EKONOM
vaclav.cepelak@bdolegal.cz