The Act on Personal Income Tax laconically defines the term “income not covered by disclosed sources or coming from undisclosed sources”, referring only to the method for establishing it.
In the rulings of the Supreme Administrative Court (NSA) it is emphasized that taxation of income from undisclosed sources is an institution of tax law, whose aim is for tax authorities to effectively fight grey areas.
According to tax regulations, the amount of income not covered by disclosed sources or coming from undisclosed sources is established by assuming as the basic amount that amount incurred by the taxpayer in the tax year of expenditures and value of property accrued this year, if these expenditures and values are not covered by property accrued this tax year or in previous years, coming from taxable income or exempt from taxation.
In the rulings of the NSA, attention is paid to the unacceptability of accumulating expenditures made by the taxpayer outside of a calendar year in one basis of taxation. On the other hand, however, in order to correctly carry out tax procedures, it is necessary to determine the amount of expenditures made in previous years, as they have an effect on the savings accrued in these years.
The Act on Personal Income Tax counts income from undisclosed sources as income which is taxed with a flat income tax, setting the tax rate at 75% of income. This tax rate is the highest among those foreseen in the Act on Personal Income Tax. Setting the tax rate so high was, according to lawmakers, meant to serve a preventative function against tax evasion. This income cannot be cumulated with other forms of income.
Actions related to tax on undisclosed sources of income, because of their character, can only be initiated ex officio. In practice, tax authorities initiate tax proceedings for income from undisclosed sources when there is a high probability that not all of the taxpayer’s income was disclosed for tax purposes. Tax offices determine the abovementioned circumstances on the basis of a comparison of the sum of expenditures for the tax year and the value of property resources accrued this year.
Tax authorities initiate tax proceedings for income from undisclosed sources as a result of a comparison of the amount of expenditures incurred by the taxpayer in a given tax year with the amount indicated on the income tax return. If the disparity between the amount of expenditures and income is considerable, the tax authority’s next step is to determine the amount of income indicated on the tax return in previous years. If income from that period still does not cover expenditures, the tax authority then resolves to initiate tax proceedings.
