1. Introduction

There are no officially available, regularly published figures showing how many tax proceedings or verification activities are conducted each year in Poland in relation to income not covered by disclosed sources. In practice, however, one may get the impression that the tax administration has been reaching for this instrument more frequently in recent times. This is supported by the growing amount of data available to the tax authorities and by increasingly advanced analytical capabilities for comparing declared income with taxpayers’ disclosed expenditure.

For many people, this comes as a surprise. Taxpayers often assume that if they have not been subject to a classic tax audit, the tax office is not analysing their financial situation. In reality, tax authorities have a range of information sources at their disposal: tax returns, data from notarial deeds, information from remitters, public registers, data obtained through verification activities and, in certain cases, also banking information or JPK data (the Standard Audit File for Tax). Ministry of Finance data concerning JPK on demand shows that this tool is used on a large scale, although not exclusively in undisclosed income cases.

The simplest trigger for the tax authorities’ interest is a substantial expenditure, especially the purchase of real estate. Tax authorities receive information about such transactions, among other channels, through notaries. If the purchase of an apartment, house, plot of land or share in real estate does not correspond to the income reported in tax returns, this may lead to questions about the source of financing. A similar risk may arise for an entrepreneur who reports losses or very low income for several years while at the same time incurring expenditure suggesting a high level of consumption. Typical warning signs may also include frequent purchases of cars, significant investments, numerous bank accounts, large loans or donations, and situations in which the taxpayer formally reports no income but acquires assets of significant value.

People who have been living in Poland only for a short time are often particularly surprised. They do not always expect the Polish tax administration to be able to compare expenditure incurred in Poland with the history of filed tax returns, information about assets and explanations concerning funds originating from abroad.

2. What the procedure involves

A case usually does not begin with a tax decision. First, the authority may undertake verification activities. These are less formalised than a tax audit or tax proceedings. Their purpose is to clarify doubts on a preliminary basis, for example by summoning the taxpayer to present documents and explanations concerning the sources of financing for a specific expenditure. In practice, the tax office may ask how the purchase of real estate, a car, shares, a renovation or another significant asset was financed. It also happens, however, that already at this stage the authority presents a calculation which, in its view, may lead to the determination of a tax base.

Verification activities are not yet tax proceedings. Taxpayers do not always appreciate their importance, because summonses are often drafted in technical and seemingly harmless terms. However, this is a very important stage. Explanations submitted at this point may later resurface in a tax audit or tax proceedings. Therefore, answers given quickly, without analysing the chronology of cash flows, documents and tax consequences, may significantly worsen the taxpayer’s position.

A tax audit is a more formalised mode of verification. The authority operates within a defined scope, prepares a report and the taxpayer has the right to submit objections. The audit may end without any further action, but it may also lead to the initiation of tax proceedings. Tax proceedings, in turn, are already aimed at issuing a decision establishing or determining a tax liability.

The possibility of correcting a tax return is of significant importance. This is another surprise for many taxpayers arriving in Poland from other countries. A correction of a tax return, provided it is made in the correct procedure, does not entail negative consequences apart from the obligation to pay tax with interest. In particular, in such a case it should not involve fiscal penal liability. As a rule, a taxpayer may correct filed returns at any time, including during verification activities, but this right is suspended for the duration of a tax audit or tax proceedings to the extent covered by the audit or proceedings. A correction filed during that period has no legal effect. After the end of a tax audit, the right to correct generally returns, whereas after tax proceedings it remains available only to the extent not covered by the decision.

In practice, this means that the timing of the response is crucial. If the taxpayer reacts early enough, they may still be able to put their settlements, documents and possible corrections in order. Once the case enters the audit or proceedings stage, the room for manoeuvre narrows considerably.

3. Tax base and tax rate

The taxable item is income not covered by disclosed sources or income derived from undisclosed sources. The PIT Act defines it as income corresponding to the excess of expenditure over taxed income or non-taxable income obtained by the taxpayer before the expenditure was incurred.

The statutory concept of “expenditure” is broader than its ordinary meaning. It includes not only funds actually spent in a given year, but also the value of assets accumulated in the tax year. If it is impossible to determine the year in which the funds were accumulated, the Act provides special rules for their classification.

The tax base therefore corresponds to the difference between the expenditure or asset increase known to the authority and the funds that the taxpayer is able to demonstrate as originating from taxed income, exempt income, income not subject to tax or income otherwise “legal” from a tax perspective. If there is more than one such excess in a year, the tax base is the sum of those excesses.

The tax rate is very severe: the flat-rate income tax amounts to 75% of the tax base. The tax is established by a decision of the competent tax authority for the year in which the excess of expenditure over legally demonstrated sources of financing arose.

It is also worth remembering one important rule. If, in the course of the proceedings, a specific source of previously undisclosed income and its amount are established, that income should be taxed according to the rules applicable to that source, and not automatically at the punitive 75% rate.

4. Loans and donations as a source of financing

The most common line of defence for taxpayers is to refer to loans, donations, family support, funds from a partner, cash savings or income earned abroad. Such explanations may be effective, but only if they are credible, consistent and capable of being supported by documents or, at least, convincingly substantiated.

A mere statement that the money came from family or from an old loan is usually not enough. The authority will examine when the funds were transferred, in what form, whether an agreement existed, whether there were bank transfers, whether the donor or lender had the means to provide such support and whether the transaction was properly settled for tax purposes.

Relying on a loan or donation may also trigger separate tax consequences. If the loan or donation was not reported on time, the taxpayer may avoid the 75% tax on undisclosed income, but at the same time may be exposed to punitive taxation applicable to an undisclosed loan or donation. In the case of loans, this is a 20% PCC rate.

For this reason, reliance on loans and donations should be preceded by an analysis not only of whether the explanation is true, but also of what tax consequences its presentation to the authority will trigger. Sometimes it is the most reasonable strategy, although it may reveal an additional problem that had not previously been of interest to the tax authorities.

5. A few remarks from the perspective of an attorney

From the attorney’s perspective, the biggest problem is that clients very often come too late. Usually this happens only after they have already submitted explanations as part of verification activities or a tax audit. Those explanations are sometimes incomplete, chaotic, inconsistent or written under the mistaken assumption that the matter will “somehow be clarified”.

In such situations, the greatest challenge is to prepare a strategy that is, on the one hand, substantively correct and, on the other, consistent with what the taxpayer has already explained to the authority. In cases concerning undisclosed income, inconsistency in explanations is particularly harmful. The authority assesses not only documents, but also the plausibility of the story presented, the chronology of events, the logic of cash flows and the consistency of subsequent explanations.

A separate group consists of taxpayers who arrived in Poland from abroad. They often have genuine sources of income outside Poland, but are afraid to disclose them. On the one hand, they fear double taxation in Poland; on the other, an exchange of information with the country of the income source. These concerns are not always justified. In many cases, the key issues are tax residence during the period in which the income was earned, the relevant double tax treaty, the nature of the income and whether the funds were obtained before moving to Poland.

Disclosing a foreign source of financing does not automatically mean that the income will be taxed again in Poland. It is often possible to demonstrate that the funds came from a period when the taxpayer was not a Polish tax resident, or that the income had already been taxed abroad, was tax-exempt or was not subject to tax in Poland. At the same time, the decision to present such information should be preceded by a risk analysis, including the potential exchange of tax information.

The best strategy is therefore a quick response. Even the first summons to provide explanations should be treated seriously. In cases concerning undisclosed sources of income, the most important elements are chronology, documents, consistency of explanations and awareness of the tax consequences of each version presented to the authority.