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Tax authorities need to justify tax increase for late-filing

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Standard practice

Taxpayers that are subject to a tax audit often face a tax increase and/or administrative penalties. In practice, a tax increase is used more often than an administrative fine. The latter is only applied if you, for example, fail to file a tax return and you continuously fail to comply.

If the authorities want to impose a penalty, they always need to properly motivate this. A standardized reply that does not take into consideration the concrete facts of each case, as is often done in practice, is normally not allowed. If the tax authorities do not or insufficiently motivate why they apply a tax increase, the latter must be annulled due to a lack of motivation.

Tax increase

The Belgian authorities may impose a tax increase for failing to file, for a late-filing, or in case of an incomplete or incorrect filing. The level of tax increase depends on whether there is an actual intention to evade taxes on the taxpayer’s side or not. The following rates apply both to private individuals, as well as to companies:

No intention to evade taxesIntention to evade taxes
1st violation10%1st violation50%
2nd violation20%2nd violation100%
3rd violation30%3rd violation200%
4th, 5th,… violation(50%, 100%, 200%)  

If failing to file or the late filing is accompanied by an attempt to conceal the reality, use of false documents or an (attempted) bribery of tax officials, a 200% tax increase is often (immediately) levied. In that case, we are talking about actual tax fraud. Of course, this is never really applicable in the case of the average taxpayer who forgets to include something or makes a mistake in their annual return.

In the absence of any bad faith on the taxpayer’s side (e.g. an omission or minor mistake), the minimum 10% tax increase is included ‘by default’ in the template notification used by the authorities. The minimum increase is usually applied even when the inaccuracy or omission in the filing is due to a clerical or mathematical error, misinterpretation of the law or ignorance of tax or accounting rules.

The concept of bad faith (‘an actual intent to evade taxes’) depends on the presence of two elements: (i) a material element, namely an incorrect or incomplete filing that entitles the tax officer to apply an increase; and (ii) an intentional element, namely the underlying intention of the taxpayer on the basis of which the level of the increase can be determined.

An increase may only be applied when the undeclared income amounts to at least 2,500. In other words, if you, for example, fail to report a foreign bank account on which you received little or no investment income in the past year, you should normally not be subject to a tax increase. As an overall rule, the total amount of taxes due (incl. a tax increase) on your undeclared earnings may never exceed the total amount of the undeclared income itself. Needless to say, that is a poor consolation.

The tax increase is also not applicable in case of (i) a spontaneous correction of the incorrect filing by the taxpayer himself before any tax audit has taken place; (ii) when the mistake in the filing happened independent of the taxpayer’s own will. If it was impossible for the taxpayer to act differently in the given circumstances, no increase may be applied either.

It should also be noted that a tax increase due to a late filing can only be imposed for tax returns filed after 23 October 2022. Prior to this date, it was not possible to apply a tax increase for a late filing, as this not provided for in the Belgian Tax Code.

Duty to justify

Over the years, there have been hundreds of decisions in which tax courts had to rule on an administrative fine or a tax increase. By way of example, we can refer to a decision from the Liège Court of Appeal of late 2022 in which the court had to rule on the duty of the tax officer to justify a tax increase (Liège 12 October 2022, Nr. 2020/RG/659).

The tax authorities had imposed an increase on a taxpayer who had filed her tax return too late. In its motivation, the tax authorities had limited themselves to simply stating that it was already the 4th offence and that the tax increase therefore applied ‘automatically’. However, in the final decision on the assessment, the tax inspector did not address the taxpayer’s arguments about, among other things, the disproportionality of the penalty

The Liège Court of Appeal ruled that such administrative conduct could not be accepted. According to the tax court, the authorities’ decision was also poorly motivated. Consequently, the court quashed the assessment. The court confirmed that a standard motivation such as, for example, “first infringement without the intention to evade the tax: 10% increasedoes not meet the justification requirement if the taxpayer brings forward concrete arguments against the increase. 

There are many more relevant decisions out there, but this case law reaffirms once more the importance of a thorough justification when applying an increase. This is based on the fact that the tax authorities are bound by the legal requirements of reasonable justification and proper administration.

Motivation check

Thus, taxpayers that are faced with a tax increase due to a late filing should always be on their guard and always need to look for the underlying motivation why an increase is imposed.

If you want to challenge a tax increase, there are several channels available where you can ask for it to be waived or reduced. When the tax officer, who is conducting the audit, is not willing to meet your request, you can still file an administrative appeal afterwards and challenge it before the regional director of the tax administration (or an official delegated by him). Ultimately, tax increases can also be waived or reduced in tax court or by the Minister of Finance after filing a petition.

While the 10% minimum increase is often applied ‘by default’, we notice in practice that the tax authorities are often also willing to waive this, if there was really no bad intention on the taxpayer’s side and this can be properly demonstrated. However, you must always explicitly ask for it to be waived, because the taxman will not initiate this themselves.