More attention to the penalty report!

According to the Administrative Penalties Decree of the Tax Administration (BBBB), a notification (Section 67g(2) of the General Tax Act, AWR) constitutes a penalty report within the meaning of Section 5:48 of the General Administrative Law Act (Awb). However, this undermines the purpose of a penalty report. Therefore, I advocate for more attention to be given to the penalty report.

Administrative penalties are not uncommon in tax matters. A taxpayer must provide the correct information to the tax authorities in their tax return in a timely manner so that an accurate assessment can be made, which must then also be paid on time and in full. If the taxpayer fails to do so, the tax inspector may impose a penalty. In principle, this is a default penalty, but in cases of (conditional) intent or gross negligence, a more severe penalty, a punitive penalty, may apply.

Since an administrative penalty qualifies as a criminal sanction, the safeguards of Article 6 of the European Convention on Human Rights (ECHR) – the right to a fair trial – apply. In this context, Section 67g(2) AWR in conjunction with Section 5:9 Awb stipulates that before (or at the latest upon) the imposition of an administrative penalty, the taxpayer must be informed by the tax inspector, through a separate notification, about the violation and the breached regulation. According to the legislative history, such notification informs the taxpayer of the reason and nature of the accusation and the penalty to be imposed. The goal is to ensure that the taxpayer can adequately prepare their defence.

Specifically for the punitive penalty, the law (Section 5:48(1) in conjunction with Section 5:53(2) Awb and Section 67pa(1) AWR) stipulates that the inspector is required to draft a penalty report. This report is sent or handed over to the taxpayer with the invitation to attend a hearing (Section 5:50 Awb). According to the Explanatory Memorandum, a penalty report plays an important role in the subsequent procedure. It not only provides the taxpayer with information about what they must defend themselves against as soon as possible, but it can also be useful for evidence purposes (“often one of the most important pieces of evidence”) and for judicial review.

However, it is remarkable that Section 12(2) BBBB states that a notification is a penalty report within the meaning of Section 5:48 Awb. In my view, a penalty report can indeed serve as a notification, but the reverse is not true, given the legislature’s intent. The purpose of a penalty report extends beyond merely informing the taxpayer as quickly as possible. It also concerns the provision of evidence and the review by the court, and will therefore (usually) contain more information than a notification. The fact that the function of the penalty report is different and more comprehensive than that of a notification is also evident from the fact that separate provisions are included in the law for both the notification and the report, as well as from the distinction between cases where a penalty report is required (for punitive penalties) and cases where it is not (for default penalties). Moreover, the requirement for a penalty report is relatively new, while the notification requirement has existed for much longer (Section 67g(2) in conjunction with Section 67p(1) AWR, old version). By reducing the penalty report to nothing more than a notification, its purpose and necessity are, in my view, being overlooked.

In practice, however, I believe it would be beneficial to distinguish between a notification and a penalty report. By providing information about the evidence or relevant details for judicial review earlier in the process through a penalty report, there is room for a more serious consideration at the outset. The taxpayer can present (more) arguments earlier, which could prevent an unnecessary procedure or even the imposition of the penalty. If this does not happen, the taxpayer will have to wait until the objection phase, as only then do they have the right to inspect the penalty dossier held by the inspector. Therefore, a taxpayer would be wise not to simply accept the notification as a penalty report. For this reason, I believe that expert assistance in penalty cases is crucial, even in the initial phase.