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The Supreme Administrative Court on the commencement of a tax audit

The Supreme Administrative Court[1] has commented on the effects of the commencement of a tax audit on the running of the time-limit for the assessment of tax.

In general, the time-limit for the assessment of tax starts anew at the moment of the commencement of the tax audit. The commencement of a tax audit is effected by the delivery of the notice of commencement of the tax audit (the so-called formal commencement of the tax audit).

At the same time, the Tax Code contains a special rule as a safeguard against possible expedient action by the tax authorities. If the tax authorities did not proceed with the commencement of the tax audit or without undue delay thereafter to a real verification of the facts decisive for the tax assessment, the tax assessment time-limit would be restarted only at the moment when it actually commenced such verification (the so-called material commencement of the tax audit).

In the present case, the tax audit was initiated by correspondence on 10 February 2021, just a few weeks before the expiry of the original tax assessment time-limit (1 April 2021). The next action by the tax authority (the call for evidence) took place on 13 April 2021, i.e. after the expiry of the original tax assessment period.

The taxpayer argued that the material commencement of the tax audit was only triggered by the issuance of the call for evidence, i.e. (i) not without undue delay after the formal initiation of the audit (an interval of approximately 2 months) and (ii) after the expiry of the tax assessment time-limit. The continuation of the tax audit was therefore, in his view, unlawful.

The Supreme Administrative Court made two conclusions in this regard:

• It is clear from the circumstances of the case that the tax authorities were already carrying out active activities relevant for the purpose of the tax audit on the date of the formal commencement of the tax audit. This conclusion was drawn from the search activity carried out just before the commencement of the audit (the request to the bank to provide the taxpayer's account details) and from the scope of the documents requested as part of the commencement of the audit (the accounting diary, the general ledger, but also bank statements).
• Even if the moment at which the actual investigation began would be the call for evidence, the period of less than seven weeks from the failure to submit the documents requested at the start of the audit cannot be regarded as exceeding the requirement to act without undue delay. At the same time, the SAC referred to earlier case-law which considered the formal conduct of the tax authorities to be conduct where the first factual act of the tax administrator was carried out 10 months after the commencement of the audit and 4 months after the expiry of the time-limit for the assessment of the tax.

On the basis of the above, the Court dismissed the taxpayer's appeal.

The time-limit for the assessment of tax is fundamental in tax proceedings, the rules for its calculation are complex and its running may be strongly influenced by the specific circumstances of an individual case. We therefore recommend that due consideration be given to this issue.

If you have any questions, please contact the authors of this article or the EY tax team you are working with.

Authors:

Jakub Tměj

Jan Šulc

[1] See the judgment of the Supreme Administrative Court of 20 February 2023, no. 10 Afs 455/2021 - 36.