Since the start of the year there have been new laws in place regulating tax audits and tax lawsuits. The stakes are pretty high: the National Tax and Customs Administration (NAV) conducts almost 30,000 audits annually, assessing tax deficiencies of about HUF 500 billion and imposing fines of almost the same amount. Therefore it is important to know the rights taxpayers have under the new rules and the most efficient ways to fight NAV - comments Ádám Fischer, tax lawyer at Jalsovszky Law Firm. 1. How will you know that NAV is coming?
NAV usually notifies taxpayers in advance of the initiation of the procedure. At that time NAV also indicates the documents it will request, and usually visits the company’s registered office at an agreed time.
In exceptional circumstances NAV may show up at the company’s registered office unannounced. This may occur particularly if NAV has reason to believe that prior notice would frustrate the purpose of the audit. 2. Do you have to let the NTCA into your company’s premises?
Yes. The tax inspector may enter the company’s premises, and inspect corporate documents, records and the software used for bookkeeping. NAV also has the right to inspect the vehicles and premises related to the company’s activities if it reasonably assumes that the company has hidden or would destroy evidence. Furthermore, NAV may request statements from the company’s employees or persons who are, or previously were, in a contractual relationship with the company (e.g. former employees).
It is important to know that the company’s representative or consultant may be present during any audit action, including when employees or contractual partners make a statement. There, the representative may ask questions or make comments regarding the statement or the version recorded in the minutes. It is worth exercising this right, because later the authorities will work from the minutes, so if a statement has been recorded incorrectly, it will be almost impossible to correct it later.
It is not mandatory to let NAV enter private homes, however. The only exception is if the authority audits the taxpayer specifically in relation to a tax burden related to the home (e.g. tax on rental income), or the home is used for business activities as a company’s registered office or permanent establishment. 3. Do you have to tell NAV anything?
No. The representative of the business under investigation (including his/her relatives) is not required to make a statement; he/she may refuse to make a statement or respond to questions without giving any reason. Other persons, however, may only refuse to make a statement in exceptional circumstances, for example if they are bound by confidentiality (e.g. attorney-client privilege), or if their testimony might incriminate them or their relatives. 4. Do you have to give NAV the documents requested?
As a general rule, yes. It’s important, however, to make photocopies and an itemised list of the documents handed over, because frequently there are disputes as to whether NAV has received a particular document or not.
There are a few exceptions to the obligation to hand over documents. First of all, NAV cannot request any summaries or records that the company is not required to prepare under applicable law. For instance, NAV can ask the company to hand over invoices, but cannot ask that the company put together any specific summary of invoices that it would not otherwise prepare. Furthermore, NAV cannot have access to data covered by attorney-client privilege (correspondence with the attorney that falls under attorney-client privilege, documents prepared by the attorney for defence purposes, etc.); all such data and documents can be withheld.
An obvious question is should you hand over any document not requested by NAV? Although it is always worth seeking expert opinion in this matter, note that after NAV makes its first resolution, the taxpayer will have limited possibilities for presenting additional evidence. Therefore, it is important to hand over the documents that support the taxpayer’s position as soon as possible even if NAV does not request them. 5. What rights does the taxpayer have during the audit?
The company has several rights that we tend to forget about. Not only may the taxpayer’s representative be present during any audit action, he/she may also ask NAV for information on the status of the procedure or inspect the documents. This allows the taxpayer to find out what direction the audit is taking.
It is an important right of the taxpayer that it can make a statement at any time, even if it refused to make one earlier. It may be worth using the opportunity to make a statement to emphasise our position to NAV in the early phase of the procedure already. 6. When does the audit end?
The audit ends when NAV believes that it has sufficiently established the facts of the case. Under the new laws the audit must in any case be accomplished within a period of one year if the tax authority requests the statements of other taxpayers or foreign authorities in order to establish the facts.
After the audit NAV summarises its findings in a report. In the report NAV describes the facts of the case it has identified, the evidence thereof and whether it has found a tax deficiency at the company. NAV can only impose a fine in a resolution, but the mitigating or aggravating circumstances it has found in respect of the fine are indicated in the report. 7. What is a "comment"?
The comment is a counterclaim of the taxpayer in respect of the report of the tax authoring setting out the conclusions of the audit.
It should be noted that under the new Procedural Act the comment has become the most important filing that a company can submit during the audit, as the comment is the last chance for the company to present new facts or circumstances without any restriction. For instance, at this point it can still assert that it did check the tax number of the seller who issued the invoice (if it has not cited this fact before), or describe how exactly it used the goods checked. If the taxpayer fails to make such a statement in the comment, referring to these facts either in the appeal or before the court will probably not be successful, and will not be taken into consideration by the authorities.
The comment can be submitted within 30 days of receipt of the report. It is important to know that this is a so-called forfeiture deadline, which means that no comment can be submitted after it expires, even if the taxpayer can provide an excuse for the delay (e.g. being abroad). 8. How does the procedure go forward?
NAV evaluates the comment and passes a resolution. As the resolution is passed by the same NTCA entity that produced the report, the tax authority rarely comes to a different conclusion in the resolution than in the report.
An appeal may be filed against NAV resolution, which will be decided by the supervisory authority of NAV. If the authority of second instance upholds the first instance resolution, it may be contested in court within 30 days. 9. When do the tax deficiency and the fine have to be paid?
If NAV assesses a tax deficiency, it must be paid by the 15th day following the delivery of the appellate resolution. The second instance resolution is delivered approximately 1-1.5 years after the start of the audit, so that is how much time you have to prepare.
In the event that the company cannot pay the tax deficiency or the tax fine, it may request payment relief (a grace period or an instalment plan). Note that the request must be submitted within 8 days following the expiration of the payment deadline to guarantee the suspension of the foreclosure. Otherwise, if the taxpayer fails to pay the tax debt and also fails to request a grace period until the aforementioned deadline, NAV may debit the taxpayer’s account directly with the amount owed.
If the company contests the resolution in court, it may also ask the court to suspend the payment obligation until it passes it’s final judgment. Although it is difficult to calculate when the court will approve such a request, an appropriately substantiated request may also buy some time here, allowing the company to prepare for payment. 10. When should you seek professional help?
When and to what extent you should seek professional help depends on the nature of the procedure. In a simple audit where NAV has sent a prior notice it is not absolutely necessary to engage the services of a professional. If, however, NAV calls on the company to make a statement regarding a specific issue, it usually means that the authority has found a problem in the matter at hand. In this case it is advisable to talk to a professional before making the statement.
It may also be useful to bring in a professional to help with a lengthy audit, as the consistent exercise of taxpayer rights can improve the taxpayer’s position. For instance, NAV can be prevented from accessing documents or obtaining statements or documents it has no right to.
It is, however, definitely warranted to bring in a professional at the moment when NAV issues a report assessing a tax deficiency. If the comment made in response to the report is not worked out thoroughly and professionally, the taxpayer may lose certain rights and the possibility of presenting additional evidence for the entire future phase of the procedure is also lost.