In the context of a tax audit, the methods by which the tax administration may verify the accuracy of taxpayers’ declared income are divided into direct and indirect. The first consist of comparing the books and records kept with the corresponding tax returns, while the second take into account the totality of the taxpayer’s economic behaviour in order to identify any concealed income.
Thus, Article 28(1) of Law 4172/2013 (Income Tax Code) provides that the income of natural and legal persons and legal entities which carry on, or appear to carry on, business activity may be determined on the basis of any available data, or by indirect methods of audit pursuant to the specific provisions of the Code of Tax Procedure, in the following cases: (a) where the accounting records are not kept, or the financial statements are not prepared in accordance with the law on accounting standards; (b) where the tax records or other prescribed supporting documents are not prepared in accordance with the Code of Tax Procedure; or (c) where the accounting records or tax documents are not produced to the Tax Administration following a relevant request.
In parallel, paragraph 2 of the same article provides that the income of natural persons, irrespective of whether it derives from business activity, may also be determined on the basis of any available data or indirect audit methods in accordance with the relevant provisions of the Code of Tax Procedure, where the amount of declared income does not suffice to cover personal living expenses, or where there is an increase in assets that is not covered by the declared income. In practice, this means that a balance of income/expenditure is drawn up; if the declared income does not suffice to cover the proven expenses of the audited person, the resulting financial difference will be treated as concealed taxable matter and, if not justified, will be subject to tax.
In addition, Article 27 of Law 4174/2013 (Code of Tax Procedure) provides that the Tax Administration may proceed to an estimated, corrective or preventive determination of the taxable matter, applying one or more of the following audit techniques:
(a) the principle of ratios;
(b) the taxpayer’s liquidity analysis;
(c) the taxpayer’s net worth;
(d) the relationship between the sale price and the total turnover; and
(e) the level of bank deposits and cash expenditure.
Through the above techniques, the taxable income of taxpayers, the gross revenues, outflows and taxable profits of obliged persons may be determined on the basis of the generally accepted principles and techniques of auditing.
It is therefore clear that the tax administration has at its disposal a broad range of “tools” for identifying undeclared taxable matter, and this highlights the critical importance both of sound advisory services aimed at avoiding fines and interest, and of proper preparation and representation in the event of a tax audit.