How to avoid that knock on the door in the middle of the night
One of the questions that I often get asked (usually just after explaining how high the taxes are!) is the nature of the penalties for not reporting income or not paying the appropriate tax. And what happens if you report or pay late.
The Polish tax law splits its sanctions in such cases into penalty interest, and penalties. For some taxpayers, there is a big difference between interest (which just prevents you from gaining by paying late) and a penalty, which implies that you have been naughty in some way, but that's not quite how the law sees it here.
The first thing to remember about penalty interest is that it really is interest and not a penalty, but is structured in such a way that the rate charged is penal. The rate is based on the bank rate, so when that changes, the interest rate on tax changes automatically. Currently, the rate is two times the bank rate so when the bank base rate rose from 21.5% to 23% recently, the penalty interest rate on late taxes rose from 43% to 46%.
Now in the bad old days when we had chronic zloty devaluation this maybe wasn't as bad as it first looked, but now with inflation and devaluation hovering around the 10% rate per year, the penalty element of the interest on late payment is a whopping 30%+. Also, as so much of the reporting and payment needs to be made monthly, the interest is assessed automatically, even if the payment is only one day late.
When the tax due is a small amount and it gets paid one day late, the interest is correspondingly peanuts, but that doesn't matter to the tax office. You have to pay it automatically, and are supposed to calculate it yourself, and add it to the amounts you pay. If you don't, then they are entitled to take the amount you send, and allocate it pro-rata to the tax liability and the interest liability. This makes for an interesting calculation, as that means that most of the tax and most of the interest are then paid, but there remains a small amount of tax on which interest accrues, and some interest, on which interest does not accrue.
Then the next tax payment that you make will get allocated partly to this tax and interest arrears, and partly toward the actual liability it was supposed to assess.
You can imagine that if this situation carries on for more than a few months, it gets to be a nightmare to allocate the payments, particularly if the interest rate also changes during that period. Needless to say, the rate never changes on a due date, so we end up with part-month calculations.
Personally, I think that a "de minimis" waiver of the interest, if it is really peanuts, would save more time and effort than the loss of the money, particularly if it's only a few zloty, as the time and effort to reallocate payments to capture zl. 10 of interest don't seem cost-effective, but I've seen it done.
Despite it being a penalty rate, it does rank only as interest, so if you have paid late and pay the appropriately calculated amount of interest, that should be the end of it, and you should not need to worry about knocks on the door in the middle of the night from the tax office, coming to take you away.
That is, if you have filed the form on time. There are two actions that you need to make to effect the tax payment: submitting the form, and arranging the payment. Submitting the form is inevitably far more important, if we consider that the tax authorities are more interested in paperwork than money. Inevitably, it is the imperfect completion of paperwork that gives them the most opportunities to show their abilities in this area.
In particular, if the form is not filed at the correct time, this is a technical violation of the law. Now, if you go ahead and sign the return and file it late, you are liable to a penalty. If you don't file it on time, you are also subject to a penalty. The law on penalties helpfully specifies that the penalty may be between zl. 70 and zl. 6.72 milllion ($1.49 million) depending on how "serious" the violation is, and doesn't, of course, specify in which case one would apply over the other. Even if you've filed late, the fact that you had not filed on time creates a penalty situation, which is not automatically specified, and not automatically relieved by the act of filing. In certain cases, this constitutes a financial crime, which is at the very least awkward, because if your tax adviser is ever assessed as having committed a tax crime then this creates all kinds of problems for him and his professional future.
This seems particularly strange to me. If the purpose of the law is to encourage people to comply with it, then automatic penalties for what may be innocent mistakes seems to be encouraging people to not correct what was wrong and thereby avoid a penalty.
Fortunately, the tax ordinance contains an interesting provision, which renders some of this less dangerous. The tax authorities can control taxpayers and assess various violations of the law, and these controls are the mechanism whereby the penalty can be levied. The penalty can only apply, however, if the tax authority finds this before it is brought to their attention by the taxpayer. If the taxpayer notices the error, corrects the error, and pays the appropriate tax and all interest so that there is no loss to the state and the "crime" effectively become victimless, then the penalty may not be assessed.
So what your mother told you when you were small about the need for being prepared to say "sorry" and put things right when something goes wrong proves to be the moral of the story for complying with your tax obligations as well. Try to avoid wordings like "you didn't notice, but I'm telling you now so you can't penalize me," and then you should be able to avoid that knock on the door in the middle of the night as well.
Peter Ferrigno is a partner in the Warsaw office of Arthur Andersen. Adam Mariuk of the tax department assisted with this article.
