In Hungary there are more types of tax audits. A tax audit may be initiated in a certain tax type after the deadline for filing the respective tax return (in that certain tax type) has elapsed - save for audits which have the aim to collect certain data -, the on-site audits (i.e. audit of invoice issuing obligation, good-origin audits etc.) and employment registration audits. The on-site audits are made by the tax authority at the registered seat or the premises of a company, in many cases based on customer complaints. In other cases the audit takes place – based on the number of documents – either in the building of the tax authority or at the registered seat of the company.
In most cases if a taxpayer asks for tax (VAT) refund, the tax authority usually initiates an audit, in course of which all documents underpinning the justification of the reclaim have to be provided.
In Hungary we have very complex taxation rules in force and these rules are sometimes even for experts hard to interpret. Sometimes we violate these rules not with a straight intention, simply just because we have a lack of information regarding the applicable rules (this is typical for foreigners).
However, even the issue of an invoice can take place in an incorrect manner, which can mean that the date is wrong or some mandatory elements are missing. In many cases the accounting of a company is incorrect because the contract serving as base for the tax reclaim contains a wrong wording or has incorrect elements in respect of its content. Unfortunately this can cost us a lot!! In case of real estate utilizations combined with a sale and purchase (or without it), the incorrect wording of the contracts from a taxation perspective is a typical problem.
In Hungary a special act regulates tax audits and also how to conduct them, and the tax authority has also its special procedural rules. Our colleagues – as all of us had worked previously for the tax authority – are not only aware of the applicable tax laws but of these special procedural rules and other applicable internal regulations as well.
In course of a tax audit we have the opportunity to fully represent you in front of the tax authority, you don’t even have to appear. We discuss in detail the position of your company with your bookkeeper and represent your company afterwards. This representation is always based on a mutual cooperation, in course of which we examine in detail the accounting and other documents of your company and inform you, if something is wrong or if something has to be replaced.
The phases of a tax audit:
- You may contact us in the last phase of a tax audit, i.e. if the tax authority has already established with its resolution tax underpayment and certain sanctions. In this case our room for maneuver is quite tight, but even in such phase we often managed to achieve better end results.
- You may contact us, if the problems have not occurred yet, but the tax audit has already started. In such phase we are still in a good position as we have enough time to complement documents or to modify former statements. Many people don’t want to pay at that stage for the services of a tax expert or a tax lawyer as they don’t see that they might face a problem.
- You may prepare yourself in advance for a tax audit (when the tax authority has not yet initiated a tax audit against you), in course of which you have a lot of opportunities to remedy certain errors or problems. Our clients typically ask for such services in case the tax authority has initiated a tax audit against our business partner or if we have some problems with our bookkeeper or with one of our employees.
- Many of our clients contact us before the establishment of a new business relationship (conclusion of a contract), which is absolutely the best time. This is a kind of preparation process in order to achieve the best taxation circumstances in respect of the transaction in question and to have contract concluded which is qualifying as correct from a taxation point of view. Prior to big transactions, we always recommend this.
We always recommend our clients to contact us as early as possible!
Possible sanctions of a Hungarian tax audit:
- default penalty – fix amount which is connection with an event of default, it may be some million forints, typically the average amount of default penalty is between HUF 10,000 to HUF 500,000 (EUR 300-1600). The amount may be cumulated with respect to the number of events of default, therefore the amount of the penalty can be multiple.
- tax fine – the amount of the tax fine may be 50, 75 or 200% of the amount of the tax underpayment. This means that if we filed an incorrect tax return – irrespective of the fact that later we might be entitled to tax deduction, which is an extenuating circumstance - we are obliged to pay 50 % of the tax underpayment as tax fine, which is huge amount.