Acts performed by the tax administrator within a local inquiry may represent material initiation of a tax audit

According to a recent ruling of the Municipal Court in Prague ref. no. 18 Af 11/2021, the tax administrator exceeded the regulatory framework of local inquiry by performing acts corresponding in their nature and intensity to a tax audit; and thus the statute of limitation period for tax assessment was suspended due to the formal initiation of the tax audit.

Under the established case law of the Supreme Administrative Court, the purpose of a local inquiry is to collect initial information that can be subsequently used in tax proceedings. It is often emphasised that the sole purpose of a local inquiry is to collect background information and “map the terrain”. If, by contrast, the tax administrator already actually inquires or verifies the circumstances relevant for a correct tax assessment, it goes beyond the regulatory limits of a local inquiry and performs acts typical for a tax audit, including the potential impacts on the duration of the period for tax assessment.

In the considered case, the tax administrator verified the taxable entity’s legitimacy of the deduction claimed for research and development within a tax audit based on which it additionally assessed corporate income tax with penalties for the taxable person.

What mistake did the tax administrator make?

The tax administrator performed an extensive local inquiry of the taxable person before the formal initiation of a tax audit. This fact subsequently led to an earlier suspension of the tax assessment period (the tax administrator linked the suspension to the formal initiation of the tax audit), which resulted in an additional tax being assessed after the three-year statute of limitation period, which makes the assessment unlawful.

For this reason, the tax administrator went beyond the limits prescribed by law, which requires it to complete the inspection procedure and additional tax assessment within three years. The tax could thus not be additionally assessed for the taxable entity, and it won the dispute. It was proved once again that it makes sense to defend oneself.

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