In 2023 and now at the beginning of 2024, we are seeing a trend of an increasing number of NRA checks on individuals, and sometimes even on individuals who are difficult to say that they lead an immodest lifestyle. In this article we will look in detail at why the National Revenue Agency (NRA) focuses its attention on certain individuals and how we can protect ourselves.
Although cases of checks on individuals are relatively rare, they are an essential part of the control and collection strategy. One of the main reasons for these checks is the suspicion of income evasion. When the tax authorities notice significant discrepancies between the declared income and the lifestyle or acquired property, this automatically arouses interest. Questions follow:
How is such a lifestyle maintained with so little declared income? Or vice versa - what is the reason for the modest lifestyle with declared high incomes?
Apart from suspicions of income evasion, another common trigger for tax checks is irregularities in tax returns. Even unintentional errors or omissions can cause the NRA to question the veracity of the information provided. In such cases, the agency may decide to conduct a deeper analysis of the financial situation of the person to determine whether there is a basis for tax evasion or other financial irregularities.
This verification process usually begins with an analysis of the initial balance of the person's financial condition.Tax authorities are trying to draw up a complete picture, which includes all assets, liabilities, income, expenses and other financial transactions. Particular attention is paid to expenses that are not explainable by the declared income. For this purpose, tax officials use various sources of information - from bank statements to data on real estate transactions, trips abroad and even information from utilities.
It is important to note that the inspection does not always lead to the detection of tax violations. In some cases, after a thorough examination, it may be found that everything is in order and that the person's expenses and income are covered. At such moments, the verification process ends, thereby confirming the correctness of the person's tax behavior. On the other hand, if inconsistencies between income and expenses are found, this can lead to a more thorough revision and possible sanctions.
Of course, each case is unique and depends on numerous factors. The NRA follows strict procedures and methodologies to ensure that all inspections are objective, fair and in accordance with the law. Therefore, it is important to approach with an open mind and understanding to this process, which is an inevitable part of the modern tax system.
The process of tax verification in the NRA is complex and thorough, starting with the creation of a detailed “tax picture” of the person being audited. This picture covers all aspects of his financial situation - from property and investments to sources of income and expenses. The aim is to establish whether there are grounds for suspecting income evasion, which could lead to a more thorough audit.
To build an accurate picture of the financial situation, the NRA uses a methodology that includes various subjective and objective assessments. The initial balance of the financial condition of the person is calculated taking into account possible savings, acquired inheritances, income from the work experience of the person and his partner, as well as other factors. This assessment is particularly important because many people do not keep detailed records of their financial operations.
The next step in the verification process is the matching of the person's income and expenses for the relevant period, also taking into account all acquired assets. To obtain cost information, tax officials turn to a variety of sources, such as utility providers, overseas travel, communication services, car dealers, construction companies, public registers, and banks. This helps to draw up a clear picture of the person's financial flows.
Additionally, the NRA estimates a person's daily expenses, for which no notes are typically kept, using standardized National Statistical Institute (NSI) estimates of household maintenance. This approach is important because it makes it possible to objectively measure costs, even when there is a lack of documentation.
Revenue is also analyzed in depth. In cases where the person has received donations, they are taken into account and may trigger checks on donors or creditors to establish whether they really have sufficient funds for these transfers. Such checks shall be carried out when there are doubts as to the reliability of the data provided.
The ultimate goal of tax checks is to compare and analyze the expenses and acquired property of the person against the declared income and his initial financial balance. If it is established that they coincide or that the income, together with the initial balance, is sufficient to cover the expenses and the assets acquired, the check ends without follow-up. However, in the event that the expenses and property of the person are significantly higher than the declared income, this serves as grounds for suspicion of a tax violation and leads to a more thorough audit.
The duration of the tax audit is strictly regulated by law. In principle, it can last up to 3 months, but in more complex cases this period can be extended to 6 months. In exceptional circumstances, by decision of the Director of the NRA, the audit can last up to 3 years. These time frames are important to ensure that the process is efficient and does not drag on without good reason, ensuring fairness and efficiency of the tax system.
The rights of tax officers when checking an individual are wide-ranging and strictly regulated in order to effectively conduct tax procedures. These rights include the ability to enter the homes and other properties of the inspected persons, which gives them the opportunity to carry out inspections and inventories of property. This is an important part of the verification process, as it allows the tax authorities to collect information about the standard of living and financial resources of the person.
Tax authorities also have the right to seize original documents and require certified copies of documents and technical media. This allows the tax authorities to check the accounting records and other financial documents of the person, which is crucial to establishing the complete financial picture.
Another important right that taxpayers have is to require the person to declare their bank accounts, both in Bulgaria and abroad. This makes it possible to analyze bank transactions and flows of finance, which can reveal hidden income or other financial discrepancies.
In addition, tax officials may require written explanations for acquired property, trips abroad and other expenses. This includes the requirement of information from various service providers such as electricity, water, heating, internet and mobile communications. Thus, they can compare the cost of these services with the declared income.
Important! Tax authorities also have the right to request information from government offices, employers and banks, having the opportunity to disclose banking and insurance secrecy when this is necessary for the verification. This includes access to documents that were submitted to banks when granting loans and other financial operations.In the event that the person refuses to allow tax payers to their home or other property of their own, they have the right to demand the intervention of the police to ensure such access. It is a last resort measure that applies when there are reasonable suspicions of tax evasion or other financial irregularities.
It is important to note that all actions of tax authorities must be in accordance with the law and be subject to objective assessment and analysis. At any stage of the verification process, persons have the right to appeal against actions to secure evidence and to seek judicial review of such actions. This ensures a balance between the rights of the tax authorities and the protection of the rights of citizens.
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Inspected persons have a number of rights that are guaranteed by law to ensure fairness and transparency in the tax inspection process. One of the most important rights is the protection of the personal honor and dignity of the examiners. Everyone has the right to be treated with respect and without undue intrusion into their privacy, especially during the stressful tax inspection process.
In addition, the inspected have the right to require tax officials to legitimize themselves. This ensures transparency and confidence that the procedure is carried out by authorized persons who are indeed representatives of the NRA. It is also important that individuals are made aware of their rights and the consequences of any refusal to cooperate. Thus, they can make an informed decision about the degree of cooperation with the tax authorities.
The right to protection of the information that taxpayers receive is also key. Any information collected during the inspection must be kept secret and not disclosed unnecessarily. This includes both personal information and financial data.
Those audited are also entitled to free references to the information that the tax authorities have collected at any given time. This allows them to track what data has been collected and how it is used in the verification process.
Another important right is the opportunity to express an opinion on the findings in the course of the verification itself, before it is completed. This allows the inspected person to present his point of view and to refute possible inaccuracies in the observations and conclusions of the tax authorities.
In addition, the auditors have the right to appeal the findings of an inspection or audit that has already been completed. This is an important aspect of the process of protecting their rights, as it allows to challenge the decisions of the tax authorities.
In case of illegal actions or inactions on the part of the tax authorities, from which the person suffered damage, there is the right to compensation under the Law on State Responsibility. It is an essential mechanism to ensure fair treatment and redress possible wrongdoing.
With regard to written explanations, according to the DOPP, the audited entity is obliged to provide them to the questions asked to it. This also includes persons who are related and can contribute to the completeness of the verification. However, the right to refuse to provide written explanations is vested in close relatives of the audited entity, as well as persons who would self-incriminate or cause criminal prosecution for themselves or their relatives. This also includes persons who are legally obliged to keep a professional secret and who would violate that secrecy if they answered the questions of the tax authorities. This rule protects both the rights of the inspected and those of their relatives, ensuring fairness and legality in the verification process.
Proof of the origin of cash is a key element in the process of tax checks, especially when it concerns individuals. Although the main focus of the tax administration is legal entities, due to their significant place in the economy and the fact that they are the main taxpayers, individuals can also be subject to audit.
In the case of legal entities, the origin of the funds is usually more clearly documented due to their obligation to keep accounting. When auditing a company, fictitious transactions and the reliability of accounting records are of primary interest. Often, such checks also include counter-checks on the persons declared as sources of funding, verifying that these persons have indeed had the opportunity to provide the funds.
Regarding individuals - they do not keep accounting in the same way, which creates potential opportunities for income evasion. Where the tax authorities detect visible discrepancies between the declared income and the expenses of an individual, they may require from the person evidence of the origin of the funds. Such cases usually include situations where a person's expenses significantly exceed his documented income.
The purpose of these checks is to combat the shadow economy and establish tax liabilities. In the event that income is found to be hidden, the person is charged the taxes due and the corresponding interest. These actions are important to ensure fairness and equity in the tax system, ensuring that all individuals pay their fair share of taxes in accordance with their financial capabilities and real income.
The main problems in proving the origin of cash to individuals are often associated with the lack of adequate evidence. Some types of income, such as those from employment relationships, are usually relatively easy to prove due to the availability of documentation such as employment contracts and payment documents. However, other types of income such as loans and donations are often challenging, as strict documentation is often lacking.
One of the biggest problems is missing the deadline for declaring income. This can be both intentional, in order to avoid taxation, and involuntarily, due to ignorance or delusion. The most frequent cases of intentional non-declaration of income are related to the performance of a certain type of service for cash payment, which the NRA would find very difficult to prove.
When proving income, it is important to provide evidence of their origin. Declared and taxable income is usually clear and not subject to verification. The problem arises when it comes to income that is not taxable and therefore requires additional proof. This is where the loans and donations received come into play, which often create difficulties.
To prove and declare loans, the Personal Income Tax Act (ZDDFL) requires information on all loans received or granted that exceed certain thresholds. It is important that these loans are documented, the best proof being a bank transfer statement, in which a “cash loan” is indicated as the basis for the transfer. Cash receipts received are less reliable due to the difficulty of establishing the date of their creation, unless they are properly drawn up.
Regarding donations, they are not necessarily included in the tax return, but can be declared voluntarily. Here again, the best evidence is bank transfers. It is important to note that the NRA may conduct a donor countercheck, especially for significant amounts.
Revisions may only cover a certain period back in time, up to a maximum of 5 years. It is possible that the person has savings from before this period, which can be used for expenses. In such cases, it is necessary to provide evidence of the availability of these funds, and bank statements can serve as adequate proof.
To protect yourself from checking the NRA and its potential consequences, it is important to be informed about your rights and the options for appealing an audit act. When the NRA finds that there are funds of unproven origin, it may issue an audit deed establishing undeclared income. Normally, this income is presumed to be hidden from business or employment and is subject to general income tax, as well as to the social security contributions due.
It is important to know that the revision act issued by the NRA can be appealed to the court. This is a key right of the inspected person, which allows to challenge the legality and validity of the act. Often, during audits, procedural violations of the legal requirements provided for in the Tax and Insurance Procedure Code (DOPC) may occur. Such violations may be grounds for the cancellation of the revision act by the court.
For example, in decision No. 17635 of 23.12.2019 in case No 7203/2019 of the Supreme Administrative Court (SAC), a hypothesis of the existence of procedural violations in the audit of an individual was considered. In such cases, if it is found that the NRA has not complied with the procedural rules, the revision act may be canceled by the court.
Our advice is to approach such cases with care and seek the assistance of a qualified legal specialist who can help in the analysis of the audit act and represent the interests of the person before the court. This ensures that all procedural and legal rules are respected and that the rights of the person are protected in the best possible way.
At Elan Consulting, we understand the concerns and challenges that arise with NRA audits and tax audits. That is why we are the best choice for you in such situations:
At Elan Consulting, we are dedicated to providing high quality services that help our clients navigate successfully through complex tax situations. We are here to support you every step of the way.
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