On 4 April 2019, the Dutch State Secretary for Finance, Mr Menno Snel, sent a letter to the Dutch Lower House in which he informed the Members of Parliament about the state of affairs of some pending motions and commitments. In the section about the state of affairs concerning the voluntary disclosure scheme, our attention was drawn in particular to a number of passages about ‘the sincere mistake’.
If no intentional act or gross negligence, then no negligence penalty
At the request of the Parliament, Mr Snel paid attention to the question of how he could dispel taxpayers’ fear of a penalty if they had made a sincere mistake in their tax return. Mr Snel answered that a penalty could only be imposed if there had been an intentional act or gross negligence. A sincere mistake will not qualify as gross negligence or as an intentional act, which means that in that case there is no reason to fear a penalty. Mr Snel went on to say that he therefore believed there would not be any added value in including a provision in the law that a negligence penalty should not be imposed in the case of a sincere mistake.
At first glance, Mr Snel’s reply was legally correct. Nonetheless, on second thoughts we think that this part of Mr Snel’s letter may lead to misunderstandings.
When is a mistake sincere?
Firstly, we consider that the concept of a ‘sincere mistake’ can easily be regarded as an extra threshold for exemption from penalties. What is meant exactly by ‘a sincere mistake’? What makes a mistake sincere? And what not? The word ‘sincere’ is more or less a synonym for ‘honest’. But how should it be judged if a mistake has been made ‘sincerely’? We have no idea. In our opinion, to err is human. People learn from their mistakes. For this reason, it has always been a fact that making mistakes as such has never been punishable or liable to a fine. By adding the prefix ‘sincere’, a sense of uncertainty is created rather than people being given a feeling of being cushioned against the risk of unjust penalties.
Furthermore, by introducing the ‘sincere mistake’ a situation arises in which the burden will ultimately be on the citizen who has to prove that a mistake has been made sincerely. For the inspector will probably reason that it is obvious that individuals or companies themselves are most capable of proving their own sincerity. But this route could be a wrong and dangerous one because if the inspector considers that a penalty should be imposed, it is he who carries the burden of proving the intentional act or negligence. The taxpayer is presumed innocent until proven otherwise. Because this fundamental right is legally enshrined in international treaties, it must be honoured and it may not be eroded in any way. In addition, a negligence penalty can only be imposed if it is a matter of an intentional act or gross negligence. This means that the inspector faces a high bar since gross negligence comes close to an intentional act. Therefore, negligence that is not so gross, for example sloppiness, does not justify a penalty. This evidently shows that there are other cases in addition to the sincere mistake where a penalty may not be imposed. Also, other sorts of mistakes that do not come close to an intentional act may not be punished with a negligence penalty.
No penalty, not even if the mistake is not rectified
Finally, we have discovered another catch in Mr Snel’s answer. He wrote: ‘Providing adequate public information is another way to make clear that to err is human and that a mistake can be rectified without a person having to fear a penalty.’ It goes without saying that a prompt rectification of a mistake by means of a voluntary disclosure (if still applicable) guarantees that no negligence penalty will be imposed. However, this remark should not imply that taxpayers who do not rectify their mistakes are to be put in a bad light.
In the meantime, the law provides a few cases in which there is an obligation to rectify mistakes (of which the supplementary obligation is best known). But apart from those few cases, the law does not oblige taxpayers to rectify mistakes. The only thing that is important when answering the question of whether a negligence penalty may be imposed is whether a taxpayer acted intentionally or was grossly negligent at the time the mistake was made. If the inspectors is not able to prove an intentional act or gross negligence, he/she should not impose a fine, not even if the taxpayer discovered their mistake afterwards and did not rectify it.
Mr Snel announced that he wants the Dutch Tax and Customs Administration to dispel people’s fears by providing information. However, we consider this to be a waste of money and he would do better to focus on keeping his own organisation well informed. Inspectors should be more careful when using their powers to impose a negligence penalty. Therefore, inspectors in particular should be more aware that to err is human and that a penalty is only necessary in exceptional cases. So, we conclude by saying: ‘actions speak louder than words’.