Additional assessment of tax as a prelude to criminal proceedings
Risks in the area of taxes continue to increase unnoticed in the Czech Republic. Tax assessment does not have to end with the additional assessment of the tax. This is evidenced by the fact that the Financial Administration sent an initiative to law enforcement authorities to initiate criminal proceedings on average for every third inspection that ended in a tax assessment or reduction of a tax loss. We would find a much higher ratio if we included only those inspections in which the tax was increased in excess of the tax crime. These are figures resulting from the available data of the Financial Administration, while in 2016 the ratio was halved. It is evident that the tax administrator actively submits motions to initiate criminal proceedings in the matter of taxes and thus reports thousands of cases annually.
Although many taxpayers do not admit that they may be affected by the criminal law level of tax assessment, the opposite is true. The current limit of the crime of reducing taxes, fees and similar mandatory payments is 100,000 crowns. In practice, it may be one or more documents with a total value of less than 500 thousand crowns, which were challenged within a VAT control with a subsequent assessment of, for example, unauthorized tax deduction. In such a case, the financial administration may forward the complaint to the law enforcement authorities. However, it is not true that any additional tax assessment or loss reduction meets the characteristics of the crime of tax reduction.
Czech law classifies tax crimes among intentional crimes. In practice, this means that the person intentionally committed the act or knew that his actions could cause the violation. The line between intent and negligence is often thin and unclear. Although the tax administrator states that he has developed an internal methodology for assessing intentionality, as one of the basic preconditions for a tax crime, from the high number of submitted complaints we can perceive the effort to leave decision-making on criminal law to law enforcement authorities. We are noticing a significant shift in understanding the difference between a mistake in tax obligations and an intention to reduce tax.
In the light of the above, the often quoted phrase "should and could have known" becomes more important in tax audits. Where does the mistake end and the intention begin? Is a formal error in completing an application for support during the COVID-19 pandemic only negligent, or is it a deliberate attempt to attract funds from the state budget? What steps can a taxpayer take to ensure that he or she does not become part of a VAT fraud?
The transmission of a complaint to the law enforcement authorities does not automatically mean proof and conviction in a tax crime. High financial costs in the event of litigation, breaches of credibility in relations with business partners and significant brand damage for customers are the consequences of lack of caution and prevention. Our recommendation is always to establish such internal procedures and control processes so that the risk of intentional and unintentional fault is minimized and evidence is also available to confirm this. Determining internal control procedures when selecting and verifying a new business partner is a process that should also be consulted with a tax advisor. Another way to reduce the risk is not to underestimate the course of the tax audit and to pay increased attention to the translated and proposed means of proof. It is never certain whether the tax control will be transferred, with the active participation of the tax administrator, to the criminal law level.