In this third installment of our series on tax audits, we will take a closer look at the rights and obligations of taxpayers as set forth in the Tax Code in connection with the conduct of tax audits. Right at the beginning of this article, it is important to note that the rights and obligations of a taxpayer are closely linked to the rights and obligations of the tax administrator. The rights of the taxpayer correspond to the obligations of the tax administrator, and vice versa. For example, a taxpayer has the right to request a written authorization from a tax authority official to conduct a tax audit, which corresponds to the tax authority’s obligation to present a written authorization to the taxpayer subject to the audit.
Source: https://podnikam.sk/postup-pri-danovej-kontrole-povinnosti-danovnika-roku-2018/
The rights and obligations of taxpayers and the tax administrator can be derived both from the fundamental principles of tax administration and from the provisions of Section 45 of the Tax Code. We examined the relationship between the rights and obligations of taxpayers and the fundamental principles of tax audits in greater detail in a previous article.
Pursuant to Section 3(7) of Act No. 563/2009 Coll. on Tax Administration (hereinafter the “Tax Code”), all taxpayers have the same rights and obligations in tax administration, and thus the same status. The tax administrator may not favor or discriminate between taxpayers; on the contrary, they are obligated to treat them equally. The law requires taxpayers and the tax administrator to cooperate closely during the conduct of a tax audit, through which the legislature primarily seeks to ensure the more effective fulfillment of the purpose of the tax audit. From these fundamental principles, one can also infer the right of the taxpayer to have the tax administrator conduct the tax audit without undue delayand within the statutory period of one year from the date of its commencement.
Rights of the Audited Taxpayer:
The law grants the audited taxpayer, in relation to a tax authority employee, the right:
- to request a written authorization from the tax authority employee to conduct the tax audit
In other words, this is the taxpayer’s right to verify whether the tax authority employee is authorized to conduct the tax audit. The purpose of this right is to protect the taxpayer from fraudsters as well as from the abuse of authority by tax authority employees. Although the Tax Code does not specify what details the authorization should contain, it follows from the nature of the matter that it should include information enabling the taxpayer to verify whether the person is authorized. A tax authority employee is required to present a written authorization even without being asked by the taxpayer. If the employee fails to present a written authorization, the taxpayer is not obligated to allow the employee to conduct a tax audit.
- to present the tax authority employee’s official ID card, except for tax authority employees who are municipal officials
The employee uses the official ID card to prove his or her identity and the fact that he or she is an employee of the tax administrator. If the taxpayer knows the identity of the tax administrator, he or she has the right to raise an objection of bias against him or her pursuant to Section 60 of the Tax Code.
- be present at meetings with their employees
Pursuant to Section 45(2)(f) of the Tax Code, the taxpayer is required to allow the tax administrator’s employee to meet with their employees; however, the taxpayer is entitled to attend the meeting.
If a tax administrator’s employee were to prevent the taxpayer from being present at the meeting, such conduct could constitute an unlawful act.
Here we point to situations that, unfortunately, often occur in practice, namely when the tax administrator conducts an on-site inspection at the taxpayer’s premises and asks questions of the persons present (e.g., the taxpayer’s employees) in the absence of the taxpayer. The tax administrator then often uses the answers obtained in this manner in subsequent proceedings, during a tax audit, and draws various conclusions based on them. However, we consider this procedure to be incorrect and recommend that taxpayers defend themselves against such a procedure, as it constitutes a circumvention of the institution of witness examination, during which the taxpayer has the right to be present (must be notified in advance) and also has the right to ask the witness questions, comment on the witness’s testimony, and so on. The described procedure of the tax administrator, which frequently occurs in practice, effectively results in the deprivation of the taxpayer’s rights related to the institution of witness examination, and we recommend objecting to such a procedure as unlawful.
- to submit evidence supporting their claims during the tax audit and to propose evidence available to the tax administrator that they cannot submit themselves, no later than the date of its conclusion
The taxpayer should be able to substantiate the facts stated in the tax return, as also follows from the judgment of the Supreme Court of the Slovak Republic in Case No. 5 Sžf 11/2007, which states: “that the plaintiff (note: the taxpayer) bears the burden of proof to substantiate all facts that must be stated in the tax return (in particular the amount of income, the amount of expenses, the amount of input tax and the amount of output tax, or, where applicable, the amount of the tax liability itself).” At the same time, however, we note that, as is also evident from established judicial precedent, the taxpayer’s burden of proof is not unlimited or absolute. If a taxpayer is aware of evidence that they cannot produce themselves, but the tax administrator has the means to obtain such evidence, the taxpayer should clearly and unequivocally propose to the tax administrator and demand that the tax administrator secure this evidence.
In practice, during tax audits, the tax administrator often makes an incorrect legal assessment of the shift in the burden of proof in tax proceedings and disproportionately shifts the burden of proof onto the taxpayer. In principle, the process of proving should be based on the rule that if the tax administrator questions the credibility, truthfulness, or completeness of the evidence submitted by the taxpayer, such questioning must be substantiated, i.e., based on real and verifiable facts, evidence, and not merely a formal assertion. A very common conclusion reached by the tax administrator and stated in tax audit reports is that the taxpayer has not met the burden of proof and thus has not demonstrated—for example—that the delivery of goods/services took place or that the goods/services were delivered by the entity listed on the invoice.
- to inspect the minutes of an on-site inspection conducted at another taxpayer in connection with a tax audit being conducted at the audited taxpayer
If the taxpayer did not directly participate in the on-site inspection conducted at another taxpayer’s premises, the tax administrator is required to allow the taxpayer to inspect the minutes if the results of the on-site inspection are relevant to the tax audit being conducted at the taxpayer’s premises. However, in this case, we propose that if the tax administrator relies on formal statements made by individuals in the context of another tax proceeding (on-site inspection), the taxpayers should request that these individuals be questioned as witnesses during the tax audit of the taxpayer as well.
- ask questions of witnesses and experts during an oral hearing
The law imposes an obligation on the tax administrator to notify the taxpayer or their representative in a timely manner of the examination of a witness or expert. The Supreme Court of the Slovak Republic defined the examination of a witness, for example, in its judgment ref. no. 6 Sžf 28/2011 as follows: “if a natural person is to comment in tax proceedings on important circumstances concerning other persons known to them, this constitutes the examination of a witness.” A witness statement obtained without notifying the taxpayer of the examination so that the taxpayer had the opportunity to participate in the examination is invalid as evidence.
- to comment during a tax audit on the facts established, on the manner in which they were established, or to propose that their comments on them be included in the report
During a tax audit, the tax administrator is required to inform the taxpayer of the facts established by them as well as the manner in which they were established. The taxpayer has the right to comment on all facts discovered by the tax administrator during the tax audit. The comments of the audited taxpayer are subsequently included in the report if the taxpayer so requests. The taxpayer has the right to receive ongoing information from the tax administrator’s employee. The purpose is to ensure that the taxpayer can comment on the facts during the tax audit, rather than only at its conclusion or after receiving the report concluding the tax audit.
The Supreme Court of the Slovak Republic, in its decision ref. no. 4 Sž 65/2001 dated October 30, 2001, also published in the Collection of Decisions of the Supreme Court of the Slovak Republic No. R 91/2002, stated that: “a prerequisite for the finding that is to serve as the basis for the tax authority’s decision is that the taxpayer be given the opportunity to fulfill their burden of proof, to propose and present evidence that they cannot secure from their position as a private-law entity, to comment on the established facts and the manner in which they were obtained. Failure to comply with this procedural requirement not only jeopardizes the purpose of the tax proceedings but, above all, constitutes a violation of the taxpayer’s rights, which are expressly granted to them by law.”
- inspect the borrowed documents at the tax administrator’s office during its regular office hours
The taxpayer or their representative is not authorized to inspect documents containing classified information, or documents the disclosure of which would affect the legally protected interests of other persons, documents whose disclosure could frustrate or substantially impede tax administration or frustrate or substantially impede the clarification or investigation of a matter under special regulations, information regarding the disclosure or provision of tax secrets to the Police Force or law enforcement authorities, and the summary report pursuant to this provision; this does not apply if such information is used as evidence in tax administration.
Obligations of the audited taxpayer:
In this section, we will examine in more detail the obligations of the taxpayer set forth in Section 45(2) of the Tax Code; however, it is important to note that the taxpayer is also bound by other obligations arising from the provisions of this Act and other generally binding legal regulations.
The audited taxpayer has the following obligations in relation to the tax administrator’s employee:
- to allow the authorized employee of the tax administrator to conduct a tax audit
The taxpayer is obligated to allow the tax audit to be conducted to the extent strictly necessary to achieve its purpose.
An exception applies if the tax administrator acts in violation of the Tax Code, for example, if they fail to present a written authorization even upon the taxpayer’s request. If the taxpayer does not allow the tax administrator’s employee to conduct the tax audit, the tax administrator will apply an alternative method of tax assessment and determine the tax based on available evidence.
- ensure a suitable location and conditions for conducting the tax audit
The tax audit is conducted at the taxpayer’s premises or at a location where the purpose of the audit requires it. Most often, the tax audit is conducted at the taxpayer’s registered office or business premises.
- Provide the requested information either personally or through a person designated by the taxpayer
The information requested by a tax authority official may be provided either by the taxpayer being audited or by an employee authorized by the taxpayer.
- submit, during the tax audit, records required to be maintained by a specific regulation, and other documents evidencing economic transactions and accounting entries, in the form required by the tax administrator, if they are maintained in this required form, including records and entries required to be maintained by the tax administrator, and provide oral or written explanations regarding them
If a taxpayer maintains and subsequently submits records in a form other than that requested by the tax administrator’s employee, the taxpayer’s obligation to submit the records is considered fulfilled, and the tax administrator is not authorized to penalize the taxpayer for submitting the records in a different form. The taxpayer is obligated to provide oral or written explanations regarding the submitted records upon the tax administrator’s request.
- submit evidence supporting their claims during a tax audit
Submitting evidence supporting the taxpayer’s claims is not only their right but also their obligation. The taxpayer must prove the facts that the tax administrator requested them to demonstrate during the tax audit. It is important to note that during a tax audit, the tax administrator may only verify facts related to the specified type of tax for the specified tax period. The tax administrator therefore cannot require the taxpayer to submit evidence unrelated to the type of tax being audited for that tax period. The taxpayer is also not required to submit evidence unrelated to the conduct of the tax audit.
- allow access to the registered office, place of business of the audited taxpayer, and to its business premises, and allow for discussions with its employees
The taxpayer is required to allow the tax administrator’s employee access to the registered office (in the case of legal entities), place of business (in the case of individuals), or business premises, if necessary for the conduct of the tax audit.
The taxpayer must also grant access if the tax administrator’s employee needs to enter the registered office, place of business, or business premises for the purpose of conducting discussions with employees of the audited entity.
- lend documents and other items outside the registered office, place of business, or business premises of the audited taxpayer, and provide statements or copies thereof
Any tax administrator employee shall confirm receipt of the documents and other items separately upon receipt. The tax administrator shall return the borrowed documents and other items to the audited taxpayer no later than 30 days after the conclusion of the tax audit; this does not apply if the tax audit was concluded by the delivery of a notice of tax assessment based on auxiliary data. If the taxpayer does not allow the tax administrator to return the borrowed documents within the specified period, the tax administrator shall send the taxpayer a request to collect the documents. If the taxpayer fails to collect the documents within 30 days of receiving this request, after the expiration of the deadline for assessing the tax or tax difference, or—in the case of accounting documentation—after the expiration of the document retention period established by a separate regulation, the tax administrator is authorized to destroy the borrowed documents.
- allow access to the software and information and communication tools that the taxpayer uses to conduct business activities, and to the output data from such software
The audited taxpayer is obligated to allow the tax administrator’s employee access to software and information and communication tools only if it is necessary to ascertain or verify facts decisive for the correct determination of tax.
The law firm Hronček & Partners, s. r. o. has extensive experience in representing entities during tax audits involving various types of taxes, where it assists taxpayers in defending and asserting their rights and protecting their interests against incorrect or unlawful procedures by public authorities. In the area of tax matters, we work closely with a recognized 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.
