Wednesday, 28 August 2019

Change in the significance of the observation in tax audits

As you could already read on numerous forums, by the recoding of the tax procedural legislation in Hungary has changed the function of the observation in tax audits. Since January 1, 2018, the observation is of primary importance in judging matters.

In the following, we briefly summarize what "role" has the observation in tax audits under the Tax Administration Act. In the current post, we focus on tax audits, and follow up on the law enforcement check later.

"One observation – above all"

The secondary role of the observation has been determined by the fact so far that in prac-tice it was possible to expect a meaningful change in the assessment of the taxpayer's case from the second-instance authority proceedings. However, in processes started in 2018, the observation has of primary importance. According to the new legislation, the appeal - apart from the grounds of nullity can no longer be relied on as a 'new' fact already known to the taxpayer prior to the adoption of the first instance decision, which was specifically referred to him by the tax authority but was not made by the taxpayer.

Practically speaking, the information known by the taxpayer and requested by the tax authority shall be included in the procedure at the latest when the observation is made, after that it is no longer possible.

"Speak now or listen forever ..."

The special call of the tax authority must contain only the circumstances and findings in rela-tion to which the tax authority invites the taxpayer to provide evidence in the event of legal consequences. Practically, this may mean that the tax authority issues a general call for evidence, and this is a sufficient basis for "obliging" the taxpayer to provide all the relevant evidence he knows. So, evidences he did not present at this time can no longer be involved in the procedure. Thus, from the receipt of a special call from the tax authority to the decision of the first instance, the taxpayer should be more careful in assessing the information he knows: that is, he must decide whether, or not to use it in the proceedings.

Of course, there may be facts or circumstances that will come to the attention of the taxpayer later than the decision at first instance. The question is how the taxpayer will be able to prove when he got to know the fact he would use as evidence.

Who falls behind: misses out

Another significant change is that the deadline for submitting an observation in the case of a tax audit has been extended from 15 days to 30 day but has become limited. Namely, someone who misses the deadline can no longer submit the observation. In the light of the above, however, it is likely that the taxpayer will have the opportunity to supplement his observations made in due time. What else could he do if he knew, before the decision was made, but after the 30-day observation period, information that the tax authority had called on him to publish and which he wanted to use.

Final Solution – activity

Overall, it can be stated that the change has the advantage of taxpayers actively participating in the audit at an earlier stage than before, and to ask tax inspectors for information on the status of their case. And, if you are discussing them with tax experts, you can help with the evaluation of the available information and evidence. That is why, in the early stages of the audit, it is worth involving an experienced tax advisor so that the findings - after tax authority decisions - do not have to realize that penalties could have been avoided.