Is it worthwhile raising expired tax obligations in a proceeding involving unreported income?
So far it has not afforded any protection to taxpayers facing an assessment for unreported income to assert income on which tax is no longer due because it is barred by the statute of limitations.
However, a recent judgment by the Province Administrative Court in Białystok provides taxpayers some hope.
Under Art. 20(3) of the Polish Personal Income Tax Act, the amount of income not covered by reported sources or deriving from unreported sources is determined on the basis of the assets gathered by the taxpayer during the tax year, and expenditures incurred, if such amounts are not covered by the assets gathered prior to incurring such expenditures or gathering such assets, deriving from income previously taxed or exempt from taxation.
Under this regulation, doubts have arisen with respect to the situation of taxpayers who indicate as the source of coverage for the expenditures income on which they failed to pay tax but as to which the statute of limitations under the Tax Ordinance has already run.
The majority of tax authorities and administrative courts take the position that even if the circumstances in which the taxpayer earned such income are clear, the income does not reduce the basis for taxation calculated on the basis of regulations concerning unreported income, because the income does not derive from taxed income or tax-exempt income (e.g. judgments of Province Administrative Court in Warsaw dated 2 December 2009, Case No. III SA/Wa 1679/08, and 9 March 2007, Case No. III SA/Wa 2273/06).
This view, which is unfavourable to taxpayers, raised certain doubts for the administrative court in Białystok in its judgment dated 17 February 2010 (Case No. I SA/Bk 499/09). The court explained that the interpretation adopted by the tax authorities in practice means taxation of income as to which the tax obligation is time-barred. Accepting this interpretation would mean that the state could tax income without any limitation in time. This would undermine the institution of the statute of limitations, which is designed to provide legal certainty. Tax law does provide for certain restrictions on the statute of limitations, but when they operate to the detriment of the taxpayer they are always expressly provided for in the regulations (e.g. Art. 6(4) of the Estate and Gift Tax Act). There is no reference in the provisions concerning unreported income to revival of a tax obligation, or other indication that the parliament intended to restrict application of provisions concerning the statute of limitations.
In line with the view taken by the court, it may also be pointed out that Art. 20(3) of the Personal Income Tax Act enables taxpayers to indicate income “free from taxation.” This provision may be interpreted to mean that income “free from taxation” is any income with respect to which the state (or other public entity) holds no tax claim. Thus the provision could refer to income expressly exempt from taxation, or, as here, income as to which the tax obligation has expired for purposes of Tax Ordinance Art. 59, for example by becoming barred by the statute of limitations.
The reasoning presented by the Białystok administrative court and an analysis of the concept of income “free from taxation” both lead to the conclusion that the tax authorities should accept income as a source for covering expenditures where the obligation to pay tax on the income is barred by running of the statute of limitations provided in the Tax Ordinance.
Radosław Teresiak, Tax Law practice group, Wardyński & Partners