Supplementary returns filed to implement tax auditors’ interpretation cannot result in surcharges

The General Taxation Law contains surcharge rules applying where parties with tax obligations file late returns voluntarily and spontaneously, in other words without a prior request from the tax authorities. These surcharges vary according to the length of time that has run from the end of the voluntary filing period. They amount to 5%, 10% or 15% if the return is filed after up to three, six or twelve months, respectively; and to 20%, if they are late by twelve months or more. In this last case, late-payment interest also becomes chargeable in respect of the period that has run from the end of those twelve months.

These surcharges apply also where supplementary returns are filed, in other words, where the return was filed within the time limit but that return was later corrected and resulted in a greater amount of tax to be paid over or in a lower amount to be refunded than in the original return.

In practice, the tax authorities are imposing these surcharges indiscriminately without regard to the reason for filing a supplementary return. The courts have been clarifying for some time, however, that those surcharges are not allowed to be assessed where the supplementary return originated from a procedure by the authorities that has effects on periods falling outside the scope of the review. This often happens for example where the assessment proposed in a notice is based on tax credits that the party with tax obligations has already used in returns for later periods, which forces the taxpayer to file supplementary returns for those later years if the auditors do not broaden the scope of their work.

This view was taken by the National Appellate Court in judgments dated December 13 and December 21 2018, in which it concluded that late-filing surcharges are not allowed to be assessed where the returns result from audit work on prior years.