In tax proceedings, it is permissible to conduct an inspection of the premises or even the residences of taxpayers. Since this is a sensitive issue, particularly from the perspective of infringing on the privacy and inviolability of taxpayers’ homes, I will summarize below the circumstances under which this is permitted and provide recommendations on how to proceed.
The official conducting the tax proceedings is required to establish all facts relevant to reaching a lawful and correct decision and must apply the same diligence in establishing facts that are in the taxpayer’s favour, unless otherwise provided by law. In this regard, the burden of proof generally rests with both parties – FURS (Financial administration of the Republic of Slovenia) must prove the facts on which the tax liability is based, while the taxpayer must likewise prove the claims in their favour. Both parties have access to a range of evidence, which includes inspections or entry into premises or buildings. Inspection or entry is also permitted in premises that are not owned by the taxpayer.
The question of the appropriateness of evidence based on an on-site inspection
From the perspective of evidence, it should be emphasized that written documentation (e.g. accounting records) takes precedence over other forms of evidence in tax proceedings; the latter are generally used only if written documentation is absent or incomplete/ inappropriate (in which case the tax authority must also justify why any written documentation is not appropriate).
Furthermore, the appropriateness of the selected means of evidence in relation to the facts to be proven is also an important consideration. In the context of a specific tax inspection, for example, the primary question is whether FURS will, by entering the premises, be able to prove the facts it alleges or the conclusions it draws based on the current status of the proceedings (e.g. if FURS is inspecting the condition of a property – can this be adequately determined by the inspection alone?). An additional issue may arise from the fact that the property is not owned or possessed by the taxpayer, and therefore the taxpayer may not have exclusive control over its condition or over what is actually located within the property.
We therefore advise taxpayers to obtain clear answers from FURS to the following questions before the inspection takes place:
- What are the key aspects that FURS wishes to verify or that FURS considers problematic regarding the building or apartment? What violations does FURS seek to prove?
- What documents can the taxpayer use to prove the key aspects identified above? Which documents does FURS consider to be potentially insufficient, inappropriate, or inadequate, and why?
- Could any of the key aspects mentioned above that cannot be proven with the documents listed above be determined at all through an on-site inspection?
- Does the taxpayer have the option to arrange an on-site inspection, and to what extent can the taxpayer influence the inspection so that it truly reflects the aspects being examined?
- Is there reasonable doubt that the taxpayer is conducting activities in the premises or that the taxpayer’s belongings subject to inspection are located there? If it is an apartment, you also need an answer to the question: What are the grounds for suspecting that other violations of regulations will be identified during the inspection? These are, after all, the main conditions for entering the premises (see the next point).
Conditions for conducting an inspection
Should it become apparent after the first phase that an inspection is appropriate and necessary as evidence in the proceedings, we note that, from the perspective of the scope of FURS’s powers, there is a significant difference between entering a building and entering a residence.
Entry into a building other than a dwelling
Entry into business or other premises during a tax inspection is primarily governed by the Inspection Act (in Slovene: Zakon o inšpekcijskem nadzoru; ZIN). This Act stipulates that the owner or occupant of production or other premises and land must permit an inspection to be conducted if there is reasonable suspicion that the taxpayer is carrying out activities on the premises or that the taxpayer’s property subject to inspection is located there. An inspection may be refused:
- if the premises are residential and the inspector does not have an appropriate court order,
- if the inspection would result in severe humiliation, significant financial loss or criminal prosecution,
- if the inspection would violate the duty or right to protect a business, professional, artistic or scientific secret, or
- in other cases where the inspection would violate the duty to maintain confidentiality of information learned in the course of serving as a priest, attorney, or physician, or while performing another profession or activity that entails the same obligation.
If the owner refuses to allow an inspection without the legitimate reasons listed above, the same measures may be applied against him as against a witness who refuses to testify (a fine of up to EUR 500). If, however, he still refuses to allow the inspection, it may be conducted even against his will. If the owner unreasonably refuses the inspection or cannot be located, the inspector may also seal the premises.
The Financial Administration Act (in Slovene: Zakon o finančni upravi; ZFU) provides for a similar provision, further stipulating that if there are grounds to suspect that an unreported activity is being carried out in a residence or other premises, or if it is likely that an inspection of the residential or other premises or of specific items within the premises will reveal evidence of violations of regulations supervised by FURS, such premises may be inspected only with the taxpayer’s consent. In this regard, it is therefore crucial to clarify what violations FURS suspects and whether there are grounds for refusing the inspection.
Entry into a residential dwelling
A dwelling enjoys special protection with regard to entry by public authorities. The term “dwelling” is not defined in the aforementioned sectoral legislation (nor is it defined in the Minor Offenses Act or the Criminal Procedure Act), therefore, we believe it should be understood within the framework of the constitutional concept of the right to the inviolability of dwellings, as set forth in Article 36 of the Constitution of the Republic of Slovenia. Within the framework of constitutional legal doctrine, a dwelling means a home, i.e. the physical environment in which a person has a legitimate expectation of privacy. What matters are the nature and actual exercise of residence in a specific property. This must constitute a self-contained spatial unit, separate from the rest of the space accessible to the public; however, it need not necessarily be locked, nor does unauthorized entry require the overcoming of any obstacles. In this regard, it is therefore always necessary to analyze whether, in a specific case, the dwelling can be considered a living space where privacy is reasonably expected, or not.
In accordance with the ZIN, the primary rule regarding a dwelling is that an inspector must obtain a decision from the competent court to enter or inspect a dwelling if the owner or occupant objects. The court will authorize an inspection of the dwelling if there are grounds for suspicion:
- that an unauthorized activity is being carried out in the dwelling,
- that an activity is being carried out in the dwelling in violation of regulations,
- that objects, animals or other items are being kept in the dwelling in violation of regulations, or
- that other violations of regulations will be discovered during an inspection of the dwelling or of specific items within the dwelling.
Two adults must be present as witnesses during the inspection of the dwelling. The inspection is limited to that part of the dwelling that needs to be examined to fulfil the purpose of the inspection. Therefore, if entry into the dwelling is requested as part of a tax inspection, the owner or occupant may refuse entry and the inspection if the inspector does not have a valid court order.
Other procedures that could serve as a basis for conducting an on-site inspection
Should the above options not provide a basis for an on-site visit within the tax inspection, or should the property owners reasonably refuse the inspection, we would like to point out that the following procedures – which, under certain conditions, may be initiated as part of the tax inspection or in parallel with it – also permit an on-site visit, entry and examination of the premises:
Minor offence proceedings
If FURS detects a minor offense (e.g. even in the context of a tax proceeding involving the submission of inaccurate or incomplete information in a tax return), it may initiate minor offence proceedings to impose minor offence sanctions (e.g. a fine). In doing so, for the purpose of conducting expedited proceedings, it may also request a house search, which under conditions analogous to those applicable in criminal proceedings may only be ordered by a court: to conduct a house search (which includes both the defendant’s dwelling and other premises belonging to the defendant or other persons – a concept understood to be broader than the dwelling itself), there must be reasonable grounds to suspect that a minor offense has been committed, and it must be probable that the search will uncover evidence or items relevant to the minor offense proceedings. Compared to entering premises within the tax inspection, the grounds for conducting a house search are broader, but the grounds for suspicion must be better substantiated, as the latter requires a higher standard of proof. A house search is ordered by an investigating judge upon a written request from the minor offense authority. The search warrant is served on the owner of the premises, who may request the presence of an attorney; the presence of witnesses is also required.
Criminal proceedings
If there are grounds to suspect that a criminal offense has been committed, criminal proceedings may also be initiated. All state authorities, including FURS, are required to file criminal complaints if they detect suspected criminal offenses. Regarding tax matters, the Criminal Code defines the criminal offense of tax evasion (Article 249 of the Criminal Code). The key legal element is that, as a result of the described conduct over a 12-month period, the evaded tax amounts to at least EUR 50,000 (substantial financial gain). This may involve the actions of the tax evader themselves (e.g. Paragraph 1) as well as those of persons who fail to cooperate with the tax authority or obstruct tax audits (Paragraph 3), which could also include the obstruction of an on-site inspection by the property owners. The procedure for conducting a house search is described in detail in section 3.1 above; a written motion to conduct a search must be filed by an authorized prosecutor.
Recommendations for taxpayers
- First, clarify with the inspector whether there is insufficient documentary evidence (which takes precedence over other forms of evidence) to accurately determine the actual circumstances, and whether conducting an on-site inspection for tax purposes constitutes appropriate evidence at all.
- It is also crucial to clarify whether the property in question is a dwelling or not, since an inspection of a dwelling may only be conducted on the basis of a court order (which is issued if there are grounds to suspect that an unauthorized activity or an activity in violation of regulations is being carried out in the dwelling, that items in violation of regulations are being stored there, or that other violations of regulations will be discovered). However, an inspection of a property that is not a dwelling is possible if there is reasonable doubt that the taxpayer is conducting activities on the premises or that the taxpayer’s property subject to inspection is located there.
- Communicate openly and cooperate actively with the inspector. If it is not possible to inspect the premises within the tax inspection or if access is justifiably denied, the risk cannot be ruled out that FURS will initiate minor offence proceedings or file a criminal complaint. Therefore, I recommend that you seek professional assistance from a consultant or attorney in a timely manner, if necessary.
