Already last year, it was noticeable that after several years of decline, the Hungarian Tax Authority conducts more and more tax audits. In 2022, the number of tax audits increased by 6.2% compared to the previous year. Experience shows that this trend is expected to continue even more strongly this year. The most commonly audited tax category remains VAT.
Stricter tax authority action
But it is not only the number of tax audits that is showing an increasing trend. Contrary to the taxpayer-friendly approach in recent years, the Hungarian Tax Authority is now acting much more rigorously during the tax audits. One consequence of this more assertive approach is that in an increasing number of cases, criminal proceedings are initiated in connection with the tax audit, and in many cases, the so-called increased tax penalty of 200% is being imposed. Another noticeable sign of the stricter and more assertive approach is that the Hungarian Tax Authority restores to temporary security measures more and more frequently. This means that the Hungarian Tax Authority, without any prior notice, already freezes the amount corresponding to the alleged tax shortfall and the planned tax penalty on the taxpayers' bank accounts before the tax audits are closed. Such a measure can potentially cripple the operations of taxpayers.
The reasons for the increase: declining tax revenues
The main underlying reason behind the increase in the number of tax audits is likely that, unlike in previous years, tax revenues significantly lag behind projections. Despite record-high inflation and the rising cost of consumer baskets, the opposite effect is being triggered: consumers are spending less and less, leading to significantly less VAT revenue flowing into the central budget. Figures published by the Ministry of Finance in August 2023 show that the projected VAT revenues for 2023 are already approximately HUF 620 billion behind schedule. This trend is further exacerbated by the abolition of certain tax categories, such as the restructuring and slimming down of green tax, which previously generated revenue in the tens of billions Hungarian forints. And it seems that the loss of tax revenue cannot be compensated by newly introduced special taxes.
What can we do?
To face tax audits with ease and confidence, it is important to keep and maintain up-to-date documentation and information related to economic activities. This is particularly recommended since, due to the deadlines for tax audits, the Hungarian Tax Authority often gives taxpayers only 5 or even 3 working days to make a statement or submit documents.
Perhaps even more important, is the selection of the right business partner, and during the partner selection process, conducting the necessary due diligence procedures and documenting their completion. Unfortunately, we increasingly find that taxpayers tend to take this lightly, treating it generously, even though in many cases, this is the quickest and most painless way to conclude a tax audit.
Having an internal scenario for what to do if the Hungarian Tax Authority initiates a tax audit can greatly ease the taxpayer’s situation. A well-structured scenario can serve as a crutch, for example, in
terms of who can make statements during tax audit and in connection with what; how to handle short deadlines of 3-5 days; when to involve an expert in the procedure; what to expect when during testimony, etc. A well-elaborated scenario can preempt haste and the potential for resulting mistakes.
Finally, regardless of type of the tax audit, it is advisable to engage an expert from the very beginning who can oversee the process with a tax litigation logic. There are documents that, if not submitted during the tax audit, cannot be replaced later. Moreover, anything we communicate to the tax authority during the tax audit can be used against us in the tax proceedings. With a thoughtless statement, we may lose the case before the tax audit has even substantially.
By Henrik Bereznai, Attorney, Jalsovszsky