Tax penalties

The burden of proving the facts underlying a penalty lies with the Tax Administration. It must prove the facts convincingly; making them plausible is not enough. In practice, however, the Tax Administration frequently falls seriously short in discharging this burden of proof. We help you to contest tax penalties effectively.

Penalties can be imposed not only on the taxpayer, but also on the taxpayer’s tax adviser, accountant, civil-law notary, and others. Special rules apply. For example, before imposing a penalty on a participant (such as a tax specialist accused of co-perpetration), the inspector must first obtain permission from the managing director of the relevant organizational unit of the Tax Administration and from the director-general of the Tax Administration’s Corporate Directorate for Tax and Legal Affairs. That approval is a prerequisite to imposing a penalty on a participant and not merely an internal instruction.

What is a failure-to-comply penalty?

A failure-to-comply penalty is deemed a minor infraction of the law and is intended to reinforce tax compliance. For example, a failure-to-comply penalty can be imposed if no tax return is filed, or it is filed late, and if certain taxes (such as VAT or wage tax) are not paid or are paid late.

What can you do against a failure-to-comply penalty?

You may file a notice of objection with the inspector within six weeks of the date of the penalty decision.

What can you argue against a failure-to-comply penalty?

A failure-to-comply penalty can be imposed for merely breaching certain statutory obligations, such as failing to file a tax return on time. Against that, a so-called AVAS defense can be raised. AVAS stands for “absence of all guilt.” This applies only in exceptional cases. Taxpayers are expected to take the measures necessary to comply with statutory obligations. Only if no fault can be attributed to the taxpayer may it be worthwhile to invoke an AVAS defence. A failure-to-comply penalty also cannot be imposed where there is a so-called “defensible position” (see below). In some circumstances, you can also argue that the penalty is too high and should be mitigated. In doing so, you may invoke personal circumstances and the principle of proportionality.

It is also important to determine carefully whether there has been a failure at all. For example, the obligation to file a return arises only once the inspector has invited you to file.

What is a culpability penalty?

A culpability penalty can be imposed only in cases of intent or gross negligence. Both are serious reproaches. Culpability penalties may be imposed through an initial assessment (in that case only where intent is present), an additional assessment for prior years, or an additional assessment for withholding taxes.

What is intent?

The element of intent consists of two components: knowledge and will. The taxpayer knows that they are filing an incorrect return and intends that outcome. In the law of tax penalties, intent has the same meaning as in criminal tax law. In both cases, it is referred to as fraud.

What must the intent be directed at?

The intent must be directed at the incorrectness of the return, assessed at the time the return is filed. Later facts or circumstances are irrelevant, although they may shed light on the situation at the time of filing. Moreover, the offense description in the penalty provision is broader than that in the criminal provision. In penalty law, intent can also be directed at other conduct (besides filing a return) that results in insufficient tax being levied.

What is gross negligence?

Gross negligence is a serious reproach. It borders on intent. It concerns a serious form of inattention, carelessness, or recklessness. The question is the degree of fault: is it sufficiently serious to be considered gross negligence?

Who must prove what?

Intent or gross negligence must be proved by the inspector. A tax penalty is qualified as a “criminal charge” within the meaning of Article 6 ECHR. That means (among other things) that the presumption of innocence applies. And that in turn means that the inspector must prove the facts underlying a culpability penalty.

How strong must the proof be in tax penalty cases?

For intent or gross negligence, the inspector must provide convincing evidence. The facts must be established beyond reasonable doubt. That is, rightly, a high burden of proof. Making facts plausible is not sufficient.

Guilt investigation by the Tax Administration

The Tax Administration does not have explicit powers to conduct a guilt investigation . Its information-gathering powers cover information that may be relevant to tax assessment. Penalties do not fall within that scope. Our view is therefore that there is no legal basis for conducting a guilt investigation. Questions about knowledge and will, or about the role of the tax adviser, should not be asked. The Ministry of Finance previously proposed to make guilt investigations legally possible. The Council of State raised serious objections, because this would entail contributing to one’s own penalization under threat of an information order, civil proceedings, or criminal prosecution. For now, the guilt investigation has not been introduced.

Defensible position? Then no intent or gross negligence.

Intent (and thus tax fraud) may not be assumed if there is a defensible position, even if the return is later found incorrect by a court. The same applies to gross negligence.

What is a defensible position?

It must concern a defensible interpretation of tax law. According to the Supreme Court, that exists when the position concerns the interpretation of tax law, i.e., a legal position. A defensible position cannot therefore relate to establishing the facts, including a court’s assessment of the evidence. However, a defensible position may relate to the legal characterization of facts.

When is a position defensible?

There must be arguments of such quality for the position that intent cannot be said to exist. The arguments must thus meet a certain standard. For example, a position should be based on authoritative literature.

A position is, in any event, defensible if, in tax proceedings, a court has found it legally correct (even if a higher court does not uphold that position). A position is also defensible if endorsed by an advocate general or if it has led to the submission of preliminary questions.

Defensibility must be assessed by objective standards. The suspect’s subjective knowledge and will do not matter in that regard. A defensible position can also be taken or substantiated after filing the return. That is connected to the objective nature of the defensible position doctrine. In other words, defensibility can also be argued later, during the tax proceedings. It is not necessary that the taxpayer had the position in mind at the time of filing.

Can a tax adviser’s intent be attributed to you?

Intent on the part of, for example, an advisor cannot be attributed to the taxpayer. The Tax Administration must therefore establish intent on the part of the taxpayer personally. Such intent must be based on the taxpayer’s own knowledge and will, independent of any intent on the part of the advisor.

May you rely on your adviser?

If you have your return filed by a (qualified) tax adviser, that does not automatically mean you are in the clear. Requirements are imposed on the taxpayer in this respect. You must exercise sufficient care in selecting and cooperating with your adviser. You cannot simply hide behind an adviser. What constitutes sufficient care will differ from case to case. It depends, among other things, on the complexity of the tax rules at issue in a return. If you have engaged a competent adviser and sufficiently informed them, you can invoke the so-called adviser jurisprudence.

Distinction between intent and (gross) negligence

If a person did not intend to file an incorrect return, intent (including conditional intent) cannot be established. This may be the case, for example, if you counted on a favorable outcome. You then do not accept the risk of incorrectness. The will component (of knowledge and will) is absent. Nor can intent be established if the inspector alleges that you could or should have known that the return was incorrect. In such a case there may be (gross) negligence, which is not intent (fraud).

What is the amount of a culpability penalty?

By law, a culpability penalty can amount to 100% of the tax underpaid. The maximum penalty for income from savings and investments (box 3) can even be 300%. Policy rules (BBBB) provide that a culpability penalty is 50% in the event of intent and 25% in the event of gross negligence. For box 3 income, that is 150% for intent and 75% for gross negligence.

Ultimately, a penalty must always be appropriate and necessary. That means the seriousness of the conduct being penalized, the specific circumstances of the case, and the person being penalized must always be considered. The inspector must take into account mitigating circumstances. Imposing a penalty should not be a mere calculation exercise, but a tailored assessment. The inspector must weigh all relevant circumstances of the case. In practice, this still happens far too infrequently. Invoking the proportionality principle can lead to mitigation because the penalty must be proportionate to the punishable conduct.

To whom can a culpability penalty be imposed?

A culpability penalty can be imposed on the taxpayer. These can be natural persons or legal entities. A penalty can also be imposed on a VAT fiscal unity as taxpayer.

Participants in punishable acts

In addition to taxpayers, tax penalties can also be imposed on other involved parties. These are also referred to as "participants". They are those who procure the act (doen plegen), co-perpetrate (medeplegen), or incite (uitlokken) the act. An accomplice (medeplichtige) can also receive a culpability penalty.

For example, a tax adviser or their firm can be designated as a co-perpetrator of a punishable act or as an accomplice.

A culpability penalty can also be imposed on a person who exercised de facto leadership over the punishable conduct. This can be, for example, the director of a legal entity. Others can also be regarded as de facto leaders.

Publication of co-perpetration penalty

If a co-perpetration penalty is imposed on a tax adviser, the inspector can also decide to publish this penalty. This applies to penalties for offenses committed after 1 January 2020. A notice of objection can be filed against both the penalty and the decision to publish it. Publication may take place only once both the penalty and the publication decision have become final.

Voluntary disclosure

The voluntary disclosure regime of Article 67n AWR gives taxpayers the opportunity to voluntarily report previously concealed income or assets to the Tax Administration. Since 1 January 2020, full penalty exemption is granted only if the disclosure occurs within two years. In the case of later disclosure, the Tax Administration may still mitigate the penalty, but only when the taxpayer cooperates fully and proactively. Those who delay reporting, withhold information, or respond only after the Tax Administration has asked questions generally do not qualify for mitigation.

In recent years, the statutory voluntary disclosure regime has been significantly curtailed and no longer applies to income from a substantial interest (box 2) or income from savings and investments (box 3). Despite the abolition of the voluntary disclosure regime in these areas, voluntary reporting is still considered a mitigating circumstance that leads to a reduction of penalties.

Why Hertoghs

Hertoghs has extensive experience in raising defenses against, and preventing, tax penalties. For example, we critically analyze the inspector’s evidence, and we often find that the inspector draws conclusions far too readily, unsupported by the facts. The point is that the facts must be established beyond reasonable doubt, that is, convincingly. The burden of proof lies entirely with the inspector.