Since the end of 2016, the tax authorities are authorized to call on the income tax payers to prove that they have properly taxed their past income. The Tax Office is entitled to issue such a call if it finds out that the difference between the taxpayer's known income and the increase in their assets, consumption or other expenses exceeds, by estimation, CZK 5 million.
Although this amendment to the Income Tax Act brought public attention and discussion when it came into effect, the agitation eventually subsided. However, the tax authorities are beginning to use the new power slowly but surely, and at the same time, the first noteworthy judicial rulings begin to appear.
It is not any novelty that the tax authorities have (or can request for) quite extensive information on the taxpayer's property, income and expenditure. As the international cooperation has also been continuously expanding and strengthening since 2016, the tax authorities have also been gradually obtaining data that allows them to get a relatively good overview of foreign gainful activities and some of the taxpayers' assets. They also learn to process this information better and more effectively and use it in tax proceedings.
It was hence only a matter of time before the first dispute concerning the “verification of the origin of property” reached the administrative courts.
Consequently, the Supreme Administrative Court has recently ruled on an action that the taxpayer filed to defend against the tax authority´s call to prove his income, or precisely, to prove their taxation. Firstly, it is clear from the content of the published court rulings that the Tax Office was able to map the assets of the taxpayer concerned in a relatively detailed manner before issuing the call. Within the scope of its powers, the Tax Office has obtained information about deposits and withdrawals on the taxpayer's bank accounts since 2010, his real estate and its purchase or market prices, registered cars and income from gainful activity and income paid from the public budget.
The taxpayer objected to the call, inter alia, by arguing that he was also asked to prove taxation of his income in the years preceding the effectivity date of the relevant law (i.e. December 1, 2016). However, both the Regional Court and the Supreme Administrative Court agreed that the tax authority´s power to call on the taxpayer to prove the taxation of their income is of procedural nature. Therefore, if the call is issued only after the law that enacted such power has come into effect, the taxpayer may also be required to prove income taxation in the taxation periods preceding the origination of this competence.
However, in this case, the administrative courts also provided taxpayers with instructions on how to effectively defend themselves against the call for proof taxation of income. The law does not allow to appeal against the call; therefore, it is necessary to defend oneself directly by administrative action. However, the question of fundamental importance is what type of administrative action to apply (whether an action against a tax administrator´s decision or an action against a tax administrator's interference). Incorrect answer to such question may have fatal consequences in the form of dismissal of the action for inadmissibility. In the present case, the Supreme Administrative Court clearly stated that the administrative action should challenge not the decision, i.e. the call for proof of income taxation itself, but the unlawful tax administrator´s interference which means the tax administrator's activity initiated by the call.
Mgr. Hana Erbsová, attorney