Audit of private individuals' income tax returns

• Conclusions
• Recommendations
• Response by the State Secretary for Finance
• Afterword by the Court of Audit

When levying and collecting taxes, the Tax and Customs Administration uses information that taxpayers have to provide themselves. This makes the tax system susceptible to misuse and improper use. To avoid missing out on tax revenues, the Tax Administration adopts a risk-based approach when checking income tax returns filed by private individuals

The Court of Audit has investigated these inspection procedures. We investigated whether the way the Tax Administration steers the process ensures that taxpayers are treated equally in equal circumstances. We also examined whether its control policy can guarantee maximum tax revenues.

Conclusions

We take a positive view of the way control policy is organised. However, we found that the Tax Administration does not yet have sufficient assurance that inspections of private individuals' income tax returns are carried out in line with policy. This is the result of shortcomings in the way the process is steered and insufficient insight into the way the checks are carried out.

In comparison with previous years, centralised steering of the tax offices that check tax returns had improved, but was still not sufficient at the time of the audit. This gives rise to differences in the way offices checked the returns for 2003. As a result, the Tax Administration cannot guarantee that all taxpayers are treated equally.

We also noted that the Tax Administration does not have sufficient insight into the results of the checks, which means that the risk-based approach cannot be evaluated properly. In addition, the way checks are recorded often fails to meet the Tax Administration's own requirements. Consequently, it does not have sufficient insight into the quality of the checks. Since in many cases the Tax Administration is unable to ascertain how the checks were carried out, it does not know for certain whether it has missed out on any tax revenues.

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Recommendations

The Court of Audit recommends that the State Secretary for Finance strengthen centralised steering of the inspections by doing more to communicate policy decisions promptly and clearly. He should also try to secure a significant improvement in the way inspections are recorded. We recommend that he ensure compliance with the relevant requirements. Lastly, we recommend that he improve the information available on the implementation of the inspections by evaluating the current instruments and their overall impact.

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Response by the State Secretary for Finance

The State Secretary for Finance responded to the audit on 3 May 2006, and broadly endorsed the conclusions. He also undertook to follow the Court's recommendations and to use its findings to strengthen control procedures for other Tax Administration activities.

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Afterword by the Court of Audit

The Court of Audit welcomes the State Secretary's positive and constructive response to the conclusions and recommendations. We are pleased that he intends to follow our recommendations and use them to strengthen control procedures for other Tax Administration activities. We will follow his plans and activities in that regard with great interest.

The findings of this audit were taken into account in the opinion we gave in our Report on the 2005 Annual Report; Ministry of Finance (IXB), published on 17 May 2005.* The 2005 regularity audit also comprised an in-depth files control of the internal quality test (FIX). We ascertained that in about half the cases the Tax Administration's decisions on private income tax are not well founded. We also ascertained that there are significant differences between the four regions examined in terms of investigation methods and the scores for the internal quality test findings.

 

We conclude that the policy on misuse and improper use was inadequate in 2005. We recommend that the Minister review whether the file instructions and guidelines for the internal quality test are useful and necessary and, after making any modifications, ensure that the Tax Administration complies with them.

In his response to our Report on the 2005 Annual Report; Ministry of Finance (IXB), the Minister of Finance largely accepts our findings and recommendations and gives various

undertakings. He does not share our opinion that policy on misuse and improper use is inadequate in relation to private income tax, but we have not altered our opinion.

 

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