Tax audit

The Tax Administration monitors compliance with tax rules in various ways. However, its capacity is limited. Choices are therefore made. Targeted attention is paid to certain tax themes.

For example, efforts focus on combating tax structures used to shield income and assets from the Tax Administration’s view. A department for Very High Net Worth Individuals (ZVP) has also been established. In this way, the Tax Administration aims to intervene more effectively where tax rules are not complied with. At the same time, the administration emphasizes that this department also aims to provide service to this ZVP target group.

Information obligations

The Tax Administration has far-reaching powers to check returns. Everyone is required to provide data and information to the inspector upon request. This applies to individuals as well as companies and other non-natural persons, such as foundations. The data and information must be capable of being relevant for tax assessment. The inspector can also request access to documents (such as invoices, proof of payment, or other administrative records) and is moreover authorized to request data stored on your computer, provided that such data are fiscally relevant.

How far do the Tax Administration’s powers reach?

In exercising audit powers, the Tax Administration must comply with the general principles of proper administration. For example, the inspector must allow a reasonable period to answer questions. Requests for information must be made as specific as possible and may not be overly broad, otherwise they fail to meet the proportionality principle. The intention is not for a tax official to rummage indiscriminately through data (files). So-called "fishing expeditions" are not permitted. For example, the inspector may not request an entire mailbox. Nor may the Tax Administration use its powers for another purpose. Audit powers may not be used, for instance, with the sole purpose of collecting evidence for a criminal case.

Equality of arms

The inspector may continue to request information during the objection procedure against an assessment. However, once an appeal has been lodged with the tax court, the inspector, in the interest of an equal fight, may no longer ask the taxpayer any questions. The inspector may, however, continue to request information from third parties.

Fair play principle

The inspector may also not request access to a tax adviser’s advice to their client. The idea is that this would be unfair. If the inspector could inspect advice, it would give the administration an unfair advantage in a debate with the taxpayer or their adviser. This is not considered desirable. Therefore, tax advisers have been granted an “informal right of non-disclosure.” That right is based on the fair play principle.

What about privacy during a tax audit?

Audit powers are extensive and often infringe on privacy. For example, you are required to allow inspection of your calendar if it also contains information that could be fiscally relevant (such as business car trips). You must then present the calendar for inspection. In practice, arrangements can often be made about redacting certain private information. Generally, however, the privacy infringement is permitted, but there are limits. A well-known example concerns the ANPR cameras installed in various locations along highways, which automatically capture license plates. These images were systematically collected, processed, stored, and used by the Tax Administration. The Supreme Court held that there was no sufficiently precise legal basis for this. There was a systematic infringement of Article 8 ECHR (right to privacy).

Information requests and tax audits

Audits by the Tax Administration come in various shapes and sizes. For example, the administration can conduct a a residence investigation to determine where someone is resident for tax purposes. Such an investigation typically starts with an information request letter from the inspector. Understandably, such an investigation deeply affects the private sphere. The inspector may investigate your social environment, the associations you are a member of, etc., and may, for example, request access to credit card records. In doing so, the inspector must observe the principle of proportionality.

The administration also regularly investigates the place of effective management of companies. This includes examining where the company is actually managed. Who is actually pulling the strings? Such an investigation also usually begins with an information request letter.

In addition, regular tax audits take place. Such an audit is generally announced in writing in advance, with a request to provide the necessary documents (for example, the accounts for a given period) digitally. A tax audit usually begins with an introductory meeting to meet the taxpayer and explain the purpose of the audit. After the audit, the inspector draws up a report of findings. It is customary for a draft report to be issued first and for you to have the opportunity to respond.

Change of phase: from tax audit to criminal investigation

It may happen that during an audit a tax official develops a suspicion (or had it beforehand) that returns have been intentionally filed incorrectly. The auditor may not simply continue asking questions and must take into account the safeguards arising from Article 6 ECHR. Under certain circumstances, for example, the taxpayer’s right to remain silent must be respected.

What if information obligations are not met?

Evidentiary sanction: reversal and intensification of the burden of proof

If a person refuses to provide information, this can have far-reaching consequences. The inspector can then decide to apply an evidentiary sanction. In that case, the burden of proof is reversed and intensified. In practice, this means that the taxpayer must prove convincingly that the assessment is too high. That is often a difficult task. Moreover, even when this evidentiary sanction is applied, the inspector must still base the assessment on a reasonable estimate.

Information order first

The evidentiary sanction for non-cooperation can be applied only once the inspector has issued a formal order requesting information. In such an order, the inspector records that certain information obligations have not been met. This gives the taxpayer legal recourse to file an objection and, if necessary, to appeal to the court.

Requirement to file tax returns

The evidentiary sanction can also be applied if the required return has not been filed. In such a case, the inspector must first make it plausible that the amounts reported in the filed return are too low, both in absolute and relative terms, and that the taxpayer knew or should have known this. If those conditions are met, the burden of proof can be reversed and intensified. In that case, no information order is required.

Failure to cooperate with a tax audit can be a criminal offense!

In addition to issuing an information order, criminal proceedings may be initiated. The taxpayer is legally required to cooperate with an audit. Refusal is even criminalized. During a tax audit, the taxpayer is also obliged to provide correct and complete information to the inspector. Knowingly providing incorrect or incomplete information is a criminal offense. The Tax Administration takes this very seriously. In some cases, views may differ on the scope of the information obligations. For example, is the inspector overstepping in the exercise of powers? It may then be the case that a taxpayer rightly takes the position that they are not (or no longer) obliged to comply with the administration’s requests.

Compelling cooperation with a tax audit

The Tax Administration can also compel cooperation with a tax audit in civil proceedings. In the civil court, compliance with information obligations is then sought under the threat of penalty payments. A civil action is usually announced in advance by the Tax Administration.

When Hertoghs

It is certainly not necessary to engage a lawyer for every audit. In many cases, your regular adviser can assist you. However, it may happen that you gain the impression that an auditor is not complying with the rules or that suspicions are expressed that things are amiss. During an audit, there can also be sharp disputes about proposed adjustments the auditors say they want to implement, or suspicions of fraud may be voiced. Or sanctions may be threatened. In such cases, it is sensible to consult a lawyer. We can map out the legal position of a taxpayer or their adviser and provide advice. Sometimes we remain in the background and monitor the process from a distance. Where necessary, we act proactively.