If the tax authority concludes that it needs more information to correctly assess the tax liability, it may decide to conduct an on-site investigation. However, few people know that a tax officer may knock on the door of an employee’s or entrepreneur’s home without prior notice.

An on-site investigation is not a tax audit and does not serve to establish or verify tax liabilities in their full scope, but it is a procedure of the tax authority to search for evidence and conduct investigations on the premises of taxable entities and other persons involved in tax administration, or at another place that is the most suitable to meet the purpose of the on-site investigation.

The aim is to obtain information needed to assess the correct amount of tax. The tax authority most often decides to conduct an on-site investigation if it needs to verify a taxable entity’s statement or to secure specific evidence that cannot be obtained in any other way. However, we must stress that this is not an administrative authority’s supervisory activity, or in any way a repressive or otherwise coercive measure, and it is up to you whether or not you provide the necessary cooperation. However, your choice will have its procedural consequences, potentially leading to a fine.

Tax officer in the field

With many people working from home for more than a year and a half, and many companies having moved their business out of their offices, it is not surprising that the tax authority can in some cases knock on the door of an employee’s or business owner’s home to directly secure evidence there.

We recommend instructing employees and setting up internal processes to ensure that the employee or the company provides the tax authority only with the information necessary for the on-site investigation and is aware of the scope of the tax authority’s powers.

Imagine, for example, a company that claims to the tax authority to have had an office furnished at its employee’s home for CZK half a million (purchased without VAT and included in the company’s expenses, of course). Or take an entrepreneur who has moved his office to his new family home and claims to the tax authority that the modern boiler for heating water, which he has bought without VAT and recorded as a business-related expense, is used for his economic activity. Similarly, a taxable entity can claim that the new laptops and LCD monitors it has purchased are used by its employees to work from home. If it seems the most suitable option, the tax authority can indeed go “into the field” to verify on the site whether this indeed is the case.

Entrepreneurs using their homes or the homes of their employees for their business should therefore be aware of their basic rights and obligations during an on-site investigation, and should properly instruct the employees they have allowed to work from home about these basic rights and obligations in advance.

Unannounced visitors

Without having to notify the taxable entity beforehand, the tax authority has the right to access plots of land, business buildings and rooms, means of transport, accounting records and other information, including data stored on portable data carriers, to the extent necessary to achieve the objective of tax administration, at a time appropriate to the subject-matter of the on-site investigation.

If the tax authority concludes that the facts cannot be ascertained in any other way, and it is necessary to do so, it may – during the on-site investigation – enter the taxable entity’s home or the homes of its employees used by the taxable entity for its business. To do so, the tax authority does not need a search warrant or any other similar authorisation document, nor is the presence of the police necessary. The tax authority may also record the course of the on-site investigation.

However, it should act to the extent necessary for such an investigation. The Tax Code states specifically: “The tax authority shall heed the rights and legally protected interests of taxable entities and third parties in accordance with legal regulations, and, in requiring compliance with their duties, shall only use such means that are least burdensome to them”. The reason for the presence of the tax administrator is stated in the protocol of the on-site investigation, but the tax authority should also state the reason to the given person as part of the advice.

To leave or not to leave the door open?

We must stress again that it is the decision of the individual person whether to allow a tax officer to enter the house for an on-site investigation, and if the person refuses, the officer may not force entry. However, under the Tax Code, the entrepreneur and other persons present are obliged to provide necessary cooperation to the tax authority during an on-site investigation – for example, to lend the requested documents and other things necessary for the investigation, to allow recording, sampling, etc.

Refusal to cooperate may have procedural consequences – for example, the tax authority may impose a fine of up to CZK 50,000 on anyone who seriously hinders tax administration during an on-site investigation by failing to follow a tax officer’s instructions or, despite a previous warning, disturbing the order or treating the officer in an insulting manner. Where the on-site investigation is conducted, for example, to verify evidence of the taxable entity’s statements, refusal to cooperate may result in the taxable entity failing to meet the burden of proof.

However, the tax authority’s powers are not unlimited. Therefore, we may encounter situations in which a tax officer is raising demands that go beyond the statutory scope of an on-site investigation. One of them may be a disguised interrogation of the employee present, conducted especially by asking inappropriate questions.

Employees should be properly instructed to ask the tax officer(s) to verify their official identity (their service card), to request the presence of the responsible person or the supervisor (e.g. an internally designated person with more profound knowledge of the tax proceedings), to insist on making a record on site and receiving a copy of it (otherwise, only an additional official record can be prepared, which is entered directly in the file), or to ask the tax officer to allow them to make an audio recording of the ongoing investigation.