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Roman Burnus | April 5, 2022

Supreme Administrative Court: On proving the taxation of amounts in a bank account

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The Supreme Administrative Court (“SAC”) has ruled on the obligation of a natural person to prove the amounts credited to his/her bank account and whether they were taxed (SAC Judgment 5 Afs 256/2020 of 22 October 2021), or whether the income in the account is not subject to tax. In the present case, the central issue was the distribution of the burden of proof in tax proceedings under article 92 of the Code of Tax Procedure (“CTP”).

The plaintiff (the taxpayer – hereinafter referred to as “TP”) reported a gross income from employment in the amount of CZK 60,000 in his tax return for the taxable period. He was employed as a managing director of a company and was also listed in the company register. In the same taxable period, the TP had income of CZK 2.4m in bank accounts. Because of doubts about the individual’s declared income, the tax administrator asked the TP to identify the amount of money that had been transferred to his bank accounts and that was apparently not mentioned in the tax return. 

The Regional Court first considered the tax administrator’s summons of 21 April 2014 to be unlawful. The assessment of the Regional Court was based on the fact that the complainant (the Appellate Financial Directorate) had failed to meet its burden of proof with regard to proving reasonable doubt under article 92 paragraph 5 of the CTP. 

However, the SAC rejected the conclusions of the Regional Court. It rejected that the doubts of the tax authority were insufficiently substantiated. The tax administrator’s invitation was sufficiently specific, clear and supported by supporting documents to enable the TP to respond adequately. Not only did TP have the same line of business as his employer and both persons traded in the same goods. The tax administrator’s doubts about the individual’s income were also evidenced primarily by deposits and receipts into TP’s account. 

The SAC stated that the TP is not only obliged to prove the income stated in the tax return. Under article 1 paragraph 3 of the CTP, a tax claim submitted by a taxpayer is only the basis for the correct determination and assessment of tax, but not the sole source. The tax administrator is entitled to ask the tax subject to prove the amounts taxed. Property declarations are not anchored in the Czech Republic and therefore it is necessary to sufficiently substantiate the doubts of the tax administrator. In this case, the procedures were reasonable and justified. The TP was obliged to clarify the origin of the funds and their possible taxation.

However, the SAC also said that prior to the commencement of tax audit, there should be an invitation from the tax authorities for additional return of the taxpayer. An enquiry by the tax administrator as to whether the taxpayer is sure of what he claims in its tax return cannot be regarded as an invitation to make a supplementary tax return. Further, it cannot be said that there was insufficient evidence to call for a supplementary return. However, the breach of duty of the tax authority in this case affects only the penalty.

The Regional Court needs to bear in mind that funds deposited into an account in a taxable period do not necessarily mean that they were income in the same taxable period.  It is necessary for the Regional Court to assess the matter in question, including whether the taxpayer has proved in whole or in part that the income in question is not subject to tax. It is also necessary to assess the question of the accounting of the tax entity and how it accounted or was obliged to account for the amounts in question.

Author: Roman Burnus, Jana Brhlová