Reduction of the default penalty: how to achieve that?

Every year, millions of Dutch people receive a request from the Tax Authority to declare their income by filing a tax return. This declaration must be submitted within a period set by the inspector (usually by 1 April). A taxpayer may request an extension. If the declaration is not received on time, the inspector will send a reminder. If the taxpayer still does not respond or responds too late, the inspector may impose a default penalty. This default penalty can be a substantial amount. If you or your client has received a default penalty, read here how – under what conditions – that penalty can be significantly reduced.

Obligation to file a tax return

For income tax and corporate tax, a taxpayer is invited by the inspector to make a declaration. The taxpayer is then obliged (AWR, Article 8) to respond to this to this invitation. The deadline for this is at least one month. In practice, this means that the income tax return must have been filed before 1 April. This year taxpayers were given a longer deadline, namely until 1 May. A corporate tax return generally has to be filed before 1 June. A taxpayer and/or his tax consultant may ask the inspector to extend the deadline for filing the income tax and/or corporate tax return (AWR, Article 10).

If the inspector has not received the tax return before the end of the deadline, the taxpayer will be sent a reminder (AWR, Article 9). In this reminder, the inspector will provide the taxpayer with an additional deadline for filing the tax return. If the taxpayer still does not file the tax return form or is late in doing so, the inspector may impose a penalty. That penalty may be a default penalty or a financial penalty.

A default penalty is imposed if a tax return is not filed or not filed on time. If a tax return is intentionally not filed, the inspector may impose a financial penalty. This blog examines the default penalty for not filing, or the late filing of, tax returns in more detail.

Default penalty

If the tax return is not filed, or filed late, the inspector may impose a default penalty. In order to be able to do this, the inspector, as already mentioned earlier, will have already reminded the taxpayer to file a tax return. If the taxpayer ignores this reminder as well, he is in default.

Article 67a of the AWR stipulates that the maximum amount of the default penalty for not filing, or late filing of, the tax return is € 5,278. Further requirements connected to imposing a default penalty are set out in more detail in the Administrative Fines (Tax and Customs Administration) Decree (BBBB).

Paragraph 21 of the BBBB regulates that the inspector will impose a default penalty of 7% of the maximum, i.e. € 369.46, if the taxpayer has not filed, or is late filing, the income tax return. If it is a company that has not filed, or is late filing, its corporate tax return, the default penalty will be 50% of the maximum, € 2,639.

Absence of all blame

The inspector can and may not impose a default penalty if the taxpayer cannot be held responsible (BBBB, paragraph 4). If the inspector only realises this during the objection phase, he will render the imposed default void. The reasoning behind this is that if the taxpayer cannot be held responsible, he has also not been in default. When is the taxpayer at fault? Who has to prove that?

The burden of proof, in the sense of demonstrating that there is an ‘absence of all blame’ rests with the taxpayer. He must present the facts and circumstances on the basis of which it can be concluded that, under the given circumstances, he has tried to ensure in all reasonableness that the tax return was filed on time (HR 15 June 2007, no. 42687, ECLI:NL:HR:2007:BA7184).

It follows from case law that it is difficult for a taxpayer to tackle this burden of proof. In the majority of cases, an appeal made by the taxpayer based on the ‘absence of all blame’ is rejected by the tax court.

One example of where the appeal was granted concerned a taxpayer who had not thought of having to file a tax return during his illness. The ’s-Hertogenbosch Court ruled that the taxpayer could not be held responsible for filing the tax return late. This ruling concerned both the circumstance that the taxpayer had not thought of filing the tax return and the circumstance that he had not made any arrangements for a ‘replacement’ before he became ill. In the case of the latter, it was important that the taxpayer had, in fact, been caught unawares by a hernia, the necessary operations and the duration of his illness.

Another example of a successful appeal based on the absence of blame is the company that had engaged a consultant to file the corporate tax return on time. This consultant had asked the inspector for an extension for filing the tax return, using a new software package. It transpired later on that an incorrect tax number had been used. On receipt of the reminder (a reminder had been sent first) and the final notice, the company contacted its consultant. In turn, this consultant phoned the tax information line. The tax information line employee informed the consultant that without any notice to the contrary, he could assume that the reminder had been wrongly sent. Despite this, when calculating the corporate tax, a default penalty was imposed. The company objected to this. The court and the court are of the opinion that, considering the consultant’s responses, the company could assume that the reminder and the final notice had been wrongly sent. Because the company reacted decisively to the receipt of the reminder and the final notice, the court and supreme court ruled that the company acted with the due care reasonably expected of it. The company, according to the court and the supreme court, did not have to go so far as to check the statements of its consultant. The default penalty was rendered void.

 The imposition of a default penalty should be done on an individual basis

Proving an ‘absence of all blame’ is subject to strict testing. In practice, tax payers often appeal on this basis to no avail. Nevertheless, imposing a default penalty should be done on an individual basis. The BBBB affords the inspector some freedom in determining the amount of the default penalty. That freedom may or may not work in the taxpayer’s favour.

If a taxpayer consistently neglects to file the tax return time and time again, the inspector may increase the default penalty to the maximum of € 5,278 (BBBB, paragraph 21.6). This increase is higher for the income tax than it is for the corporate tax, because the starting points for both taxes are different.

The taxpayer who has received a warning from the inspector that the tax return has yet to be filed has three options: respond on time, respond late or not respond. If the taxpayer does not file the tax return within the additional period, but does so before the inspector calculates the assessment or decides on an objection, the inspector will reduce the default penalty (BBBB, paragraph 21. 8, BBBB). The taxpayer will then be given a default penalty of 1% of the maximum (€ 52.78) for the income tax and 5% of the maximum (€ 263.90) for the corporate tax.

Work agreements

It has now transpired that the Tax Authority and the Ministry of Finance have made other agreements than those provided laid down in the BBBB. These work agreements were initially not announced. To force this announcement, a request was submitted under the Government Information (Public Access) Act (WOB), with success. This WOB request ensures that the government, in this case the Tax Authority, must announce the work agreements on the reduction of default penalties. The Tax Authority has now done this.

These work agreements pertain to the situation that a taxpayer has not filed, or has been late filing, the income tax return and/or corporate tax return.

If the taxpayer has not filed the tax return and he then receives an estimated assessment, he can respond to this in two ways. First, he can object to the estimated assessment. That objection will then be processed by the inspector. The second option would be for the taxpayer to go ahead and file the tax return. The inspector will also regard such action as an ‘objection’.

In the first situation (objecting), the inspector will ask the taxpayer to still complete and file the tax return. The taxpayer will be given six weeks to do this. If the taxpayer fulfils this request, the inspector will assume that the taxpayer will improve his tax compliance behaviour (in the future). The imposed default penalty after the tax return has been filed (in principle, € 369.46) will then be reduced to € 49. In the case of corporate tax, the default penalty (in principle, € 2,639) will be reduced to € 246.

In the second situation (late filing of the tax return), the default penalty will be immediately reduced to € 49 (income tax) and € 246 (corporate tax).

It seems that a taxpayer who only files the tax return during the objection phase is treated better than the taxpayer who files the tax return before the estimated assessment is calculated, (although late). Paragraph 21.8 of the BBBB stipulates that in that situation a default penalty of 1% – € 52.78 – (income tax) or 5% – € 263.90 – (corporate tax) will be imposed.

To counter this unequal treatment, it is incorporated into the work agreements that in this situation the default penalty will also be reduced to € 49 (income tax) and € 246 (corporate tax). The Tax Authority’s system should process this automatically.

By filing the income tax and/or corporate tax return late, a taxpayer can reduce the imposed default penalty considerably. So, a big financial gain for little effort.

Conclusion

A taxpayer who is invited to file a tax return, must file it on time. If the taxpayer does not do this, he will receive a reminder to do so. If the taxpayer ignores this, the inspector may impose a default penalty. This default penalty is generally € 369.46 (income tax) or € 2,639 (corporate tax).

If the taxpayer cannot be held responsible for not filing the tax return, or for not filing it on time, a default penalty cannot be imposed or the imposed default penalty must be rendered void. The burden of proof of this ‘absence of all blame’ is difficult. However, this does not make the case hopeless for the taxpayer. The default penalty can be substantially reduced in a relatively simple way. How? By simply filing the tax return form. The inspector will then assume that the taxpayer has improved his tax compliance behaviour and as a reward for this the default penalty will be reduced to € 49 (income tax) of € 246 (corporate tax).