The inspection methods of the Hungarian tax authority are constantly being refined with the advancement of digitalisation. Besides the traditional inspections enabled by the Hungarian Act on Tax Administration Rules, cooperative procedures have been added too. Cooperative procedures are not considered inspections, but rather are designed to raise awareness of risks and eliminate them.
An inspection can take on two basic forms: compliance and tax. These are initiated by the inspectors sending a notice to the taxpayer. By contrast, the “desk audit” employed increasingly by the tax authority can be carried out without any on-site visit, or even without any involvement of the taxpayer, i.e. it can be “carried out at a desk”. The relevant methods also vary considerably in terms of their purpose, length, complexity and rules of procedure.
Compliance inspection
One of the traditional inspections is the compliance inspection. This allows the Hungarian tax authority to check whether the taxpayer has complied with its obligations over a specified period, including filing returns, making declarations or keeping records. They can also check the authenticity of business events and collect data to verify the information in records and returns. The data collection may also be designed for the Hungarian tax authority to create a database of its own for future inspection activities.
A compliance investigation normally takes 30 days from the date the notice is served. A compliance investigation does not create a closed period, so the period reviewed can be adjusted by means of a self-revision, with due consideration of the limitation period. The tax authority records the results of the inspection in a report, and the inspection is deemed completed when this report is handed over. If the compliance inspection makes no findings, the tax authority closes it without adopting any resolution. Otherwise, i.e. if the investigation prescribes some obligation or legal consequence, the tax authority will adopt a resolution.
Compliance inspections serve as a warning to Hungarian taxpayers to correct errors and deficiencies as soon as possible. However, the tax authority may also order a tax inspection if it discovers graver errors during the investigation.
Tax inspection
The other traditional type of inspection in Hungary is the tax inspection, which is aimed at examining the basis and amount of tax or budgetary funding. These are more detailed and comprehensive than compliance inspections: the tax authority can investigate compliance with reporting and return obligations for several tax types, per tax, subsidy and period, or for a specific period. During a tax inspection, the tax authority may request a number of supporting documents (typically invoices, contracts, purchase orders, transport documents) and other data or statements. This is why it is worth paying attention to keeping orderly records and having the necessary documents.
A tax inspection results in a closed period, i.e. returns for this period can essentially no longer be corrected by means of a self-revision. It is important to know that it is only possible to conduct a self-revision up until the inspection notice is served. Ahead of an imminent tax inspection, it can therefore be useful to declare your intention to submit a self-revision which, once submitted, means the tax authority cannot initiate their procedure for the tax assessment period and given tax type, for a set period.
A tax inspection is normally completed within 90 days of the delivery of the notice, or within 120 days for taxpayers with high tax bills. In this case, the tax authority issues a resolution on the findings irrespective of the outcome of the procedure.
Desk audit
Unlike the above, the so-called desk audit procedure of the Hungarian tax authority does not fall within the scope of the inspections detailed in the Act on Tax Administration Rules. The term ‘desk audit’ itself is not defined in the law. According to the tax authority, a desk audit qualifies as an administrative support procedure.
With the help of digitalisation, the tax authority is continuously expanding its databases and IT systems underlying and supporting inspections. Online invoice data services, banking data services, country-by-country reports and other international information exchange systems all help the tax authority to monitor compliance with tax obligations in real time.
During a desk audit, the tax authority primarily checks the taxpayer’s activities by examining documents and data, without launching an inspection. The tax authority employs risk-analysis procedures to analyse all of the relevant information about taxpayers’ business activities and identify any tax-evasion practices but does not necessarily need to involve the taxpayer concerned.
A desk audit can detect problems due to errors or administrative failings based on discrepancies between online invoicing data and tax returns. Based on the analyses, the inspectors notify the taxpayers about these discrepancies, either by phone or email, and the taxpayers can rectify the shortfall voluntarily, in most cases without the need for a traditional inspection.
A desk audit can also crop up during tax refunds. If the data matches, the tax authority pays out the requested amount, but if the risk identified is significant, it may order an inspection. If the tax authority identifies a risk with partners issuing invoices, it can also launch a cooperative procedure or an inspection there.
Hence in practice, a desk audit is a cooperative procedure that is typically quick and does not entail significant administration, and it can reduce the burden for taxpayers in Hungary of keeping certain things under constant monitoring.
The tax consulting team of WTS Klient Hungary has extensive experience in representing businesses at the Hungarian tax authority. Whether it’s an inspection or a subsequent legal remedy procedure, you can rely on our colleagues.
