Topic: "Taxes": 1. Tax Audit and Assessment Proceedings – General Introduction

Tax audits inspire respect—or even fear—in many legal entities. An audit by a supervisory authority is generally not a pleasant experience. We believe that the key to successfully preparing for a tax audit is having sufficient information. In the following article, we will therefore provide a closer look at the basics of tax audits, define what a tax audit is, clarify who is authorized to conduct a tax audit, and explain how a tax audit begins and ends.

The Constitutional Court has defined a tax audit as a specific procedural step that takes place within the framework of tax proceedings. The primary objective of a tax audit is to ascertain and verify the facts relevant to the correct assessment of tax; at the same time, it serves to verify compliance with substantive tax regulations by taxpayers.

The tax administrator is responsible for conducting the tax audit; pursuant to Section 4 of Act No. 563/2009 Coll. on Tax Administration (hereinafter the “Tax Code”), this is the tax office, customs office, or municipality. In accordance with the Tax Code, a tax audit may also be conducted by a tax administrator without local jurisdiction; however, this does not result in a change of local jurisdiction. This does not apply, however, if the tax administrator is a municipality. The condition here is that the substantive jurisdiction of the tax administrator must be maintained. In practice, this means that, for example, a customs office is not competent to conduct a value-added tax audit, as its subject-matter jurisdiction is limited to the administration of excise taxes. Conversely, a tax office is not subject-matter competent to conduct an excise tax audit. The conditions for determining subject-matter jurisdiction are governed by the relevant legal regulations.

Commencement of the Tax Audit

As a rule, the tax administrator notifies the audited entity of the tax audit by sending a written notice of tax audit. In this notice, the tax administrator specifies the date of commencement of the tax audit. Within eight days of receiving the notice in person, the taxpayer has the option to agree on a different audit date with the tax administrator. However, the tax audit must begin no later than 40 days from the date of delivery of the notice.

The Tax Code authorizes the tax administrator to commence a tax audit even without prior notice of its conduct. In such a case, the audit begins with the drafting of a record of the commencement of the tax audit. However, an unannounced tax audit may only be conducted if the conditions defined by law under Section 46(3) of the Tax Code are met, namely if:

it is provided for by a special regulation,
law enforcement authorities request its conduct,
there is reasonable suspicion that accounting or other documents will be altered, defaced, or destroyed.

It is indeed important that these conditions be actually met in practice, specifically prior to the commencement of the tax audit. Otherwise, the supervisory authorities may violate legal regulations, which could affect the legality of the tax audit itself.

Location of the Tax Audit

A tax audit may be conducted at the taxpayer’s premises, such as the company’s registered office or business location, or at any location where the purpose of the audit requires it. The taxpayer must be notified of the location of the tax audit in the tax audit notice. The taxpayer is legally obligated to provide a suitable location and conditions for the conduct of the tax audit.

Other important details that must be included in the tax audit notice are the type of tax being audited and the tax/accounting period under review. As part of the tax audit, the tax administrator may only examine documents related to the specified type of tax for the specified tax period. However, the tax administrator is authorized to extend the tax audit to cover other tax periods or accounting periods, or to cover other taxes, and is required to notify the audited entity of this fact in writing without undue delay.

Representation in a Tax Audit (Tax Proceedings)

Any taxpayer may be represented in tax proceedings, at any stage (including a tax audit), based on a power of attorney. A power of attorney for representation is granted in writing or orally on the record before the tax administrator; in this case, the tax office shall draw up a record of this act, which must contain the elements prescribed by law. The authorized representative acts on behalf of the taxpayer within the scope of the power of attorney granted. Representation in tax administration is governed by Section 9 of the Tax Code.

A power of attorney may be granted as (i) a general power of attorney, which authorizes the representative to perform all legal acts, (ii) a special (subject-matter-limited) power of attorney, which authorizes the representative only to perform a specific type of legal acts, (iii) a specific (individual) power of attorney—which authorizes the representative only to perform a single specific legal act clearly defined in the power of attorney. If the scope of the power of attorney is not precisely defined, it is considered a general power of attorney.

An officially certified signature is not required on the power of attorney.

In tax proceedings, certain restrictions apply to representation, as set forth in the Tax Code, namely that a taxpayer may have only one representative in the same matter. If the representative is a legal entity, its statutory body or a person authorized by that body acts on its behalf. This means that even the representative cannot be represented by another person, except in cases where the representative is an attorney or tax advisor, in which case another person may act on their behalf, provided that person is also authorized by a power of attorney. Granting a power of attorney does not prevent the taxpayer from acting independently in matters for which the power of attorney was granted. In such cases, the Tax Code stipulates that if the taxpayer and the representative chosen by the taxpayer act in the same matter and their actions conflict, the tax administrator shall respect the taxpayer’s actions.

A representative of a taxpayer, a lawyer, and a tax advisor may represent an unlimited number of taxpayers before a single tax administrator.

Repeat Tax Audit

The Tax Code regulates situations in which it is permissible to conduct a repeat tax audit. A repeat tax audit is an audit that examines the same tax for the taxpayer for a tax period for which a tax audit has already been conducted(Supreme Court of the Slovak Republic, Case No. 3 Sžf/43/2007). A repeat tax audit may be legitimately conducted in the following cases:

if the taxpayer requests a tax refund via an amended tax return,
if the taxpayer requests a refund of an amount under the Income Tax Act or the Value Added Tax Act,
if a request for a repeat tax audit was initiated by the Ministry or the Financial Directorate,
if a re-audit was requested by law enforcement authorities or the Police Force.

Here we refer to the decision of the Supreme Court of the Slovak Republic, file no. 8Sžf/15/2012, dated February 21, 2013. The Supreme Court addressed the issue of the legality of a decision issued in a repeat (recurring) tax audit, which was conducted despite the fact that the “original” tax audit had not been concluded with a final decision, and expressed the legal opinion that “It is clear from the provisions of Section 15(13) of the Tax Administration Act that a tax audit is concluded by the discussion of the audit report with the audited taxpayer or their representative. The assessment proceedings under Section 44(1) of the Tax Administration Act commence on the day following the day of the discussion of the audit report. It is also clear that the assessment proceedings must be concluded with a final decision on the matter. Pursuant to Section 44(6)(b)(1) of the Tax Administration Act, if a tax audit or a repeat tax audit is conducted on a taxpayer, the tax administrator shall issue, within 15 days of its completion (Section 15(13)), an additional tax assessment if the tax determined following the tax audit differs from the tax stated in the tax return or additional tax return or report or additional report, or if the tax determined following a repeat tax audit differs from the tax assessed by the tax administrator following the tax audit, or if it differs from the tax difference in the additional tax assessment. Based on the cited provision, in the opinion of the Supreme Court, the tax administrator, following the revocation of the additional tax assessment, or assessments and after returning the case for further proceedings in the event of a regular tax audit, should have continued the assessment proceedings by reviewing the results of the tax audit within the appeal proceedings and concluded these assessment proceedings by issuing a final payment assessment or a supplementary payment assessment.

If, in the present case, the defendant issued an order to conduct a repeat tax audit after the additional tax assessment was revoked, then by doing so, the defendant violated the Tax Administration Act. The tax administrator could not conduct a repeat tax audit within the meaning of Section 15b of the Tax Administration Act, and if the tax administrator issued, on the basis of this repeat tax audit, a supplementary tax assessment for personal income tax for the tax period, this decision may be considered unlawful, and the defendant’s decision challenged by the complaint, by which he confirmed the tax administrator’s additional tax assessment, is equally unlawful."

Time Limit for Conducting a Tax Audit

Pursuant to Section 46(10) of the Tax Code, the time limit for conducting a tax audit is no more than one year from the date of its commencement. This is a statutory time limit, and its extension is possible only if permitted by law and in accordance with the procedure it specifies. If a tax audit is suspended pursuant to Section 61 of the Tax Code, the time limits under the Tax Code do not run during such suspension. In the case of a tax audit of related parties (note: a related party is defined under Section 2(n) of the Income Tax Act as (i) a close person, (ii) a person or entity economically, personally, or otherwise connected, or (iii) a person or entity that is part of a consolidated group for consolidation purposes), which determine the tax base pursuant to a special regulation), the second-instance authority may extend the time limit for conducting the tax audit, but always before its expiration, based on a written justification, by a maximum of 12 months.

The issue of the legality of the tax audit is also closely related to the question of maintaining the time limit for conducting the tax audit. We consider the judgment of the Supreme Court of the Slovak Republic, file no. 6Sžfk/63/2017, dated November 21, 2018, published in the Collection of Opinions of the Supreme Court and Courts of the Slovak Republic 1/2020, R 5/2020, in which the following legal principle was stated: “If a tax audit is unlawful, the evidence obtained and the procedures conducted within its framework are also unlawful. Nor can the conduct of evidence in the assessment proceedings remedy the defect consisting in the unlawfulness of the tax audit due to failure to comply with the statutory time limit for its conduct, since the purpose of the assessment proceedings is not to repeatedly obtain and examine evidence that has already been obtained and examined during the tax audit.”

We also draw attention to the judgment of the Supreme Court, Case No. 3 Sžf/2/2009, dated January 29, 2009, in which the court ruled that any penalties for a taxpayer’s failure to cooperate after the statutory deadline for conducting a tax audit had expired are unlawful. In this regard, the Supreme Court of the Slovak Republic stated that “It is undisputed from the contents of the defendant’s file that the statutory deadline for conducting the audit expired on May 25, 2006. As follows from the aforementioned judgment of the Supreme Court of the Slovak Republic, file no. 3 Sžf 9/2007, the audit was not in accordance with the law after this date. It follows, therefore, that after May 25, 2006, the tax authorities could not impose any penalties on him for failing to cooperate with the tax audit, as he no longer had any obligations. The conclusion of the court of first instance that he should be punished for using these funds by being subject to an audit beyond its time limit is in no way justified and is contrary to the right of a party to proceedings before any authority, as enshrined in Article 46(1) of the Constitution of the Slovak Republic.”

Conclusion of the Tax Audit

A tax audit may be concluded in three ways:

on the date of delivery of the report,
on the date of delivery of the notice of tax assessment based on estimates,
on the date the right to a refund of the excess deduction expires.

A tax audit most often ends on the date of delivery of the report. In addition to the audit results, the report also contains an evaluation of the evidence gathered during the tax audit. If the tax administrator does not identify any discrepancies during the tax audit, the audit ends upon delivery of the report directly to the taxpayer. If the tax audit results in a discrepancy regarding the amount the audited entity was required to pay/report, or for which it claimed a refund, a request to comment on the facts stated in the report is delivered to the audited entity along with the report. The audited entity has the right to comment on the report within the time limit specified by the tax administrator in the delivered request. The administrator may not set a time limit shorter than 15 business days from the delivery of the request. This is a procedural deadline, meaning that the procedural act—submitting comments on the report—must be performed no later than the last day, provided it is submitted for delivery via the method prescribed by law. We draw particular attention to cases where taxpayers are required to communicate with the tax administrator electronically.

The day following the date of delivery of the report, the assessment proceedings commence.

The tax administrator will conclude the tax audit by delivering a notice of tax assessment based on auxiliary data if:

the taxpayer does not allow the tax audit to be conducted, except for a tax audit to determine the eligibility of a claim for a refund of an excess deduction or a portion thereof
the taxpayer fails to fulfill any of its statutory obligations when substantiating the facts it has presented, as a result of which the tax cannot be correctly assessed

The final method of concluding a tax audit, i.e., the termination of the tax audit on the date the claim for a refund of excess deductions expires, applies if the audited entity does not permit the conduct of a tax audit aimed at determining the eligibility of a claim for a refund of excess deductions or a portion thereof.

Assessment proceedings

This is the next phase of the tax proceedings, which is conducted only if, along with the report, a request for comments or objections from the taxpayer regarding the report was delivered. The assessment proceedings conclude with a decision on the assessment of tax or the assessment of the tax difference compared to the previously assessed tax. In the decision issued in the assessment proceedings, the tax administrator shall determine the amount or the difference in the amount that the taxpayer was required to report under specific regulations (substantive tax regulations, e.g., Act No. 595/2003 Coll. on Income Tax, Act No. 222/2004 Coll. on VAT, etc.) or to which the taxpayer has claimed a right under specific regulations.

The tax administrator has a set deadline for issuing a decision in the assessment proceedings, namely within 15 days of the expiration of the deadline for commenting on the report, if:

the taxpayer waives in writing the right to comment on the report,
the taxpayer has no comments on the findings in the protocol,
the taxpayer does not comment on the protocol within the time limit specified by the tax administrator in the request; in such a case, the tax administrator shall make an official record of this fact.

If the taxpayer submits comments, or evidence regarding the report, within the time limit specified by the tax administrator in the notice, the taxpayer shall agree with the tax administrator on a date for discussing the comments and evidence submitted by the taxpayer. If no agreement is reached on the date, the tax administrator shall determine the date for their discussion. If the taxpayer is unable to attend the hearing, they are required to appoint a representative for this purpose. Based on the taxpayer’s written statement and the evidence submitted by them, the tax administrator shall conduct an examination of the evidence or an on-site inspection. If the taxpayer or their representative does not attend the hearing regarding the comments and evidence submitted by them, the tax administrator shall make an official record of this fact. The tax administrator shall issue a decision within three months of the expiration of the deadline specified in the request for comments on the protocol. If, due to the exceptional complexity of the case, other serious circumstances, or the special nature of the case, a decision cannot be made within three months, this period may be appropriately extended by the second-instance authority prior to its expiration, based on a written justification; however, the tax administrator must notify the taxpayer of this.

In connection with the assessment proceedings and the presentation of evidence in these proceedings, we draw attention to the judgment of the Supreme Court of the Slovak Republic, Case No. 3 Sžf 23/2007, dated February 14, 2008, in which the court reached the legal conclusion that “As regards procedural objections, in the assessment proceedings, the tax administrator evaluates the facts summarized in the tax audit report and the taxpayer’s objections to the report that are legally relevant for determining the tax. In the assessment proceedings, there is no formal examination of evidence already examined during the tax audit in the presence of the taxpayer. The result of the assessment proceedings is the tax administrator’s administrative decision based on the evaluation of the evidence, which is set forth in the supplementary tax assessment. The appellate court does not thereby rule out the possibility of taking evidence in the assessment proceedings as well, but emphasizes that this is primarily a stage for evaluating evidence from the tax audit.”

If a taxpayer considers the tax administrator’s decision to be incorrect, they have the legal right to file an appealagainst this decision as a regular remedy, which has suspensive effect. This means that the decision challenged by the appeal cannot be enforced, and this decision does not become final until a decision is made on the appeal confirming the challenged decision. The taxpayer also has other remedies, which we will discuss in future articles.

A tax audit is often not only stressful but also time-consuming for taxpayers. If you are dealing with a tax audit, we would be happy to assist and advise you. We strongly recommend that in cases where the tax administrator, as part of a tax audit, notifies the taxpayer of any doubts regarding the accuracy of the tax paid or claimed by the taxpayer, you should consult a qualified expert and advisor with experience in tax audits, who can assist and guide you through the various procedures. Failure to fulfill any obligation during a tax audit or subsequent proceedings may have irreversible consequences for the taxpayer, which may be unfavorable—and often unjustified.

The law firm Hronček & Partners, s. r. o. has extensive experience representing clients in tax audits involving various types of taxes, where it assists taxpayers in defending and asserting their rights and protecting their interests against improper or unlawful actions by public authorities. In the area of tax matters, we work closely with a renowned tax expert, tax advisor Ing. Mgr. Martin Tužinský, PhD. If you are facing a tax-related issue and need assistance, our experts are ready to lend a helping hand.