Stricter wealth accumulation audits underway

From this year it will be more difficult for individuals undergoing a wealth accumulation audit to prove that they did not conceal any income from the tax authority as a number of legal amendments were introduced making things easier for tax inspectors. From July 2013, the tax authority will have much easier and quicker access to banking data relating to the audited individuals. Through electronic inquiries from financial institutions, the tax authority will very quickly obtain the banking data having a decisive impact on the whole progress of the audit.

So far, audits of this kind were more about the identification of wealth of unknown origin. From now on, audited individuals will more frequently have to account for specific transactions. Also, the efficiency of the selection of audit objects will be improved by the fact that inquiries may now also be filed before the start of an audit, which means that the banking data of individuals will be available to the tax authority the same way as property or vehicle register data.

At the same time, the scope of evidence which may be used by audited individuals will be narrowed down substantially as, pursuant to an amendment of 2006, restrictive rules of evidence are introduced in the cases when the individual specifies a source of wealth he acquired after 15 September 2006. In practice this means that it will be very difficult for audited individuals to prove the original of their wealth as the scope of evidence which may be used is narrowed down significantly.

Restrictive rules of evidence means that the source of income accumulated outside the term of limitation, the accumulation of income itself and the date of accumulation may only be certified by data of public registers, effective court or authority decisions or other public deeds, bank accounts. In the case of wealth accumulation before 15 September 2006, free rules of evidence remain in place, i.e. in theory, any means of evidence, testimony, declaration or private deed may be used as proof of the accumulation of income.

In the case of these rather difficult and complex type of audits it was common for the outcome of the audit to be determined by minor errors or statements interpreted incorrectly. Still, however strict wealth accumulation audits may be, a serious dispute with the tax authority threatening with a higher tax finding can be avoided with proper and professional individual tax planning. Experience shows that more people acknowledge this risk and prepare for a potential audit or perform self-revisions of earlier years even just because of feeling uncertain about already accepted records. This is also important because the recently published 2013 audit guideline of the Hungarian Tax and Customs Authority shows that this year, the authority will continue to focus on wealth accumulation audits within the scope of personal income tax audits.