Tax estimated by indirect methods

What it means

Tax estimated by indirect methods is the way a tax administrator sets tax by estimate instead of calculating it from records. The Tax Procedure Code allows it when a taxpayer fails to substantiate the figures in its return, keeps no accounts or records, does not produce documents or does not cooperate, so that tax cannot be correctly determined from the documents.

Indirect evidence is any information the tax administrator has or obtains without the taxpayer's cooperation. It may include bank account data, VAT control statements, cash register data, findings from on-site investigations, comparisons with similar businesses in the sector or information from other authorities. From these, the administrator derives income and expenses.

Tax estimated this way should be as close to reality as possible but in practice tends to be unfavourable to the company. The administrator may not know all expenses or legitimate deductions, and the company has limited ways to challenge the result. The main line of defence is to show that the evidence used was wrong or wrongly applied.

How it works in practice

Indirect estimation most often happens in a tax audit when a company cannot produce documents, for example after losing its records, when a former accountant will not cooperate, or when the documents are so flawed they cannot be relied on. Before using indirect methods, the administrator must invite the company to substantiate its figures and inform it that it will proceed this way.

The best prevention is properly kept, complete accounts and careful document retention, including electronic records. When changing accounting firm, ensure all data and documents are handed over. If a company finds gaps in its records, it is better to fill them and correct matters with a supplementary return before an audit arrives.

An appeal against a tax assessment decision based on indirect methods is possible but limited: the company can challenge only the incorrect use of the evidence or incorrect findings of fact relied on by the administrator. Documents it could have produced during the proceedings usually do not help later.

What to watch out for

The most common cause is underestimating a request from the tax administrator. The company does not respond, asks for an extension without explanation or submits only part of the documents. The administrator can then turn to indirect methods. Requests must be answered on time and in full, ideally with a tax adviser's help.

Indirect estimation often comes with large additional tax and penalties. Where deliberate tax evasion is suspected, the matter can become criminal. Transparent communication with the tax administrator and an effort to substantiate the facts as fully as possible are therefore crucial.