Errors and mistakes in tax returns: individuals
As the deadline for filing personal income tax returns for 2021 approaches, it is useful to review the areas in which individuals make mistakes when preparing their returns. Below we provide you with an overview of the errors and mistakes we encounter in our practice, together with information on their impact in terms of potential penalties from the authorities.
Obligation to file a tax return and declare certain types of income
Simply put, tax returns do not have to be filed by persons with no income (or with total income up to CZK 15,000), persons whose income consists almost exclusively of employment income from one employer (other income up to CZK 6,000 in total) and persons who have entered the flat-rate regime and have not violated its conditions in any way.
In practice, we often see that individuals make errors in situations where they have earned income above the other income thresholds, but fail to file a return under the misconception that the thresholds are for profit (i.e. the difference between income and expenses) or net income, and not just the thresholds for gross income (e.g. before deducting the cost of assets or before deducting foreign withholding tax). Thus, if a person, for example, sells a car less than one year after buying it, even at a loss, or securities for more than CZK 100,000 a year even with a small profit, exchanges cryptocurrency for a new phone, etc., he or she is most likely obliged to file a tax return.
Other often overlooked reasons for filing a tax return are, for example, termination of pension or life insurance on which tax benefits were drawn, securities transactions or gains derived from securities abroad, cryptocurrency transactions such as exchanges for other cryptocurrencies or NFTs, exchanges for goods, etc. Finally there are employee stock option plans, which in some cases trigger the employee's obligation to tax the difference between the market price of the securities acquired and the consideration paid for them on the tax return (despite the expectation that the employer is always responsible for taxation).
In situations where a return is not filed, there is a late filing penalty. This is calculated on the total tax (not the additional tax) and can be quite high. It is not uncommon for persons to realise the error later. If, for example, a person who has income from employment of approximately CZK 80,000 per month files their tax return six months late, they face a penalty of approximately CZK 6,000, even though they have not made a significant profit.
If the income in question also gives rise to tax arrears, persons are liable for a penalty in the form of default interest of approximately 12% of the tax arrears for the year.
Exempt income is not included in the tax return. However, we would like to remind you of the obligation to report exempt income if it amounts to more than CZK 5 million per year. Failure to file the notification leads to significant penalties depending on the length of the delay in filing (0.1% - 15% of the exempt income). Exempt income to be reported may be, for example, income from inheritance (immovable and movable property), income from gifts (e.g. between family members), income from the sale of securities after three years of holding or business shares after five years of holding.
Deadline for filing tax returns
A relatively large number of people have noticed the change in tax filing deadlines effective from last year. From the traditional deadline of 1 April, the deadline is automatically extended to the first working day of May (2 May 2022) in certain circumstances. In order for the extension to take place, the filing must be made electronically, i.e. by data box, qualified certificate or via the My Taxes portal (with a verified identity).
At the same time, it is important to note that if the return is filed, even electronically, before 1 April, the deadline for payment of any tax arrears is 1 April and not 2 May. If a person is in a hurry to pay the overpayment, they should file their return, in whatever form, by 1 April. If, on the other hand, the filer wants to pay the tax as late as possible, they should file their return after 1 April.
Formalities of tax returns
Regarding errors in the formalities of the tax return, we often see that people fill in the address where they are currently staying and not the address of their permanent residence (i.e. from their ID card). This is most likely due to the name of the "residence address" boxes. However, incorrectly filling in the address may lead a person to file the return with a tax office other than the one with local jurisdiction or to have the return rejected. This may again result in a delay in filing the tax return before the tax authorities forward the return between themselves.
If you are filing a paper return, we recommend that you check that the return is signed, both in the signature box and on any overpayment claim (so two signatures on one page are required). Otherwise, the overpayment will not be refunded.
We also recommend that you include a contact – either phone or e-mail – on your tax return. If the tax authorities find any minor discrepancies, they will often informally (i.e. by phone or e-mail) ask the person to correct them. If no contact is given, the tax authority has no choice but to send a formal written notice, which can delay, for example, the refund of overpaid tax that many people are anxiously awaiting. If a person does not want to give the tax authority the information requested over the phone, they can of course refuse to give the information and ask for a written request to be sent. This can be handled later by a tax advisor.
Missing annexes and important conditions for claiming tax benefits
To claim the various items to reduce the tax liability, a number of supporting documents must be submitted. The signature page of the tax return form, where the "DAP Attachments" are listed at the top, can be a guide to the necessary supporting documents. In our experience, people often do not attach attachments to the tax return that are not specifically listed (mainly because only the first year of application needs to be documented). Without them, however, the tax authorities usually will not apply the items.
For the deduction in the form of interest paid on a mortgage loan for housing needs, the tax administrator requires the submission of a mortgage loan agreement in the first year of claiming the deduction. It is also advisable to submit the title deed from the Land Register. These documents must show that the conditions for claiming the deduction are met, i.e. that the person claiming the deduction is the owner of the immovable property and also a party to the loan agreement.
At the same time, it should be remembered that interest cannot be claimed from the outset when concluding a future contract. It is necessary to fulfil the condition of permanent residence in the property, which is obviously not possible if the property is under construction.
When claiming a deduction in the form of a pension or life insurance contribution, the tax authorities require the insurance contract in the first year of claim.
For the child tax credit, parents often make the mistake of both claiming the tax credit for the same child. However, the tax authorities will often catch this, as the data (e.g. the child's birth registration number) is available to them in these matters.
More tips that can reduce tax liability and speed up the tax process
It will be possible to retroactively claim the higher rate of tax credit for the second and subsequent child on your 2021 tax return (it has not been reflected in your interim wages). Therefore, unless the person has applied for an annual income tax return with their employer, we recommend that they file a tax return and claim the increased amounts.
It is quite common for individuals to claim a so-called percentage of income expenses (30% of income or CZK 600,000, whichever is lower) on their tax return for rental income instead of claiming actual expenses. However, when claiming actual expenses, it is possible to deduct tax depreciation of the rented item, i.e. a predetermined allocation of the purchase price to expenses (tax base) over the years. These are often sufficient for tax purposes to cover the rental income and so no tax liability arises on this income. However, the situation is quite complex and it is necessary to examine case-by-case in which situations the application of actual expenses together with depreciation or a change to the application of expenses in this way actually pays off.
We also recommend that you keep careful records of any acquisition costs or expenses that are offset against income for different types of income. The tax authorities can usually request these documents up to three years after the tax return is filed. The person must be able to substantiate the items, although they are not usually required to submit records and supporting materials with the actual filing. If the person fails to satisfactorily substantiate the claimed information (here, expenses), the tax authorities may assess income tax in subsequent proceedings, together with penalties (20% of the resulting tax) and interest on late payment (about 12% per annum).
For high-income earners, we recommend considering a separate tax base for foreign income from profit shares, etc., which is taxed at 15% (instead of the normal rates of 15% and 23%).
We recommend that you complete your income tax return on the EPO portal (via My Taxes), which highlights a significant number of errors ("Error Log"). Of course, you can print out the file and bring it to the tax office in paper form after the check.