A Guide to Legal Remedies Against a Tax Penalty Notice

This article is an English translation of the Turkish original published by the office.

Tax penalties are among the subjects of tax law encountered most often in practice — so much so that cases seeking the annulment of tax penalties make up a very large part of the tax courts’ workload. Below we explain how and why tax penalties are imposed and the legal options available if a penalty is imposed.

What is a tax penalty notice?

A tax penalty notice (vergi ceza ihbarnamesi) is an official document issued by the tax office informing the taxpayer of a penalty imposed for a tax offence or irregularity. It states in writing why the penalty was imposed, its amount, the period concerned and the legal basis. The notice is the starting point for the taxpayer to exercise their legal rights against the penalty.

When and how is a tax penalty notice issued?

A tax penalty notice is issued when the taxpayer acts contrary to tax legislation. These breaches can generally be grouped as follows:

1. Tax loss

Tax loss (vergi ziyaı) occurs when the state loses tax because the taxpayer did not pay on time or correctly. A taxpayer who under-declares income may face a tax loss penalty on the under-declared amount. For example, if a company declares only 600,000 lira of its actual income of 1,000,000 lira, there is a tax loss on the remaining 400,000 lira.

2. Irregularities and special irregularities

These penalties apply when the formal and substantive rules of tax legislation are not followed — for example, failing to keep books, issue invoices or file a return on time. A restaurant that does not issue invoices or receipts for its daily sales, for instance, will receive a special irregularity penalty.

3. Use of false or misleading documents

Issuing or using invoices that do not reflect a real transaction is treated as the use of false documents. A company that obtains an invoice for a service it never received and records it as an expense falls within this scope and will be penalised.

4. Profit shifting through transfer pricing

Attempting to reduce the tax base by trading with related companies at prices that are not at arm’s length may also lead to a penalty. A company selling goods to its foreign parent below market price, for instance, may be penalised on the ground that it has shifted profits abroad.

5. Concealing information and documents

Failing to submit documents requested during a tax audit, or giving false information, is another ground for a penalty — for example, not producing the journal or accounting vouchers requested by the inspector.

Legal rights and remedies against tax penalty notices

A taxpayer served with a tax penalty notice may use the following remedies:

1. Penalty reduction

Penalty reduction allows the taxpayer or the person responsible for the tax to pay a reduced amount of the tax loss, irregularity and special irregularity penalties imposed on them. It is available on condition that:

• the taxpayer applies to the tax office within 30 days of service of the notice;
• the tax or tax difference assessed, and the penalties remaining after the reduction, are paid on the due date or, if security of the kind specified in Law No. 6183 is provided, within three months of the due date;
• the notice has not been challenged in court.

Where penalty reduction is used, tax loss, irregularity and special irregularity penalties are reduced by half (50%). (The reduction rate may differ in some cases — for example for repeated tax loss penalties — so the current text of Article 376 of the Tax Procedure Law should be checked.)

2. Settlement

Under the Tax Procedure Law, taxpayers may seek a settlement (uzlaşma) with the tax office before the penalty becomes final. Settlement is an agreement between the administration and the taxpayer on matters such as the amount of the penalty and payment terms. It is often preferred because it is faster and less costly than litigation; if no settlement is reached, the taxpayer’s right to sue is preserved.

The settlement process:

• Application: the taxpayer may request settlement within 30 days of service of the tax/penalty notice.
• Settlement commission: the request is assessed by the tax office, and the taxpayer is invited to the commission on a set date.
• Negotiation: the taxpayer and the administration negotiate the penalty; it may be cancelled entirely or reduced by a certain percentage.
• Settlement report: if the parties agree, this is recorded in a report and the matter can no longer be taken to court; if not, the taxpayer may sue.

Settlement and penalty reduction are both administrative routes aimed at easing the taxpayer’s burden, but they differ considerably in legal nature, application and consequences.

In settlement, the taxpayer applies to the tax office and negotiates directly with the administration on the amount of the penalty and/or the tax. It offers a more flexible mechanism: the parties may agree on all or part of the penalty, and in some cases even on the tax itself. The report drawn up at the end binds the parties and the agreed amount becomes final, so no lawsuit can be filed on the matter once settlement is reached.

Penalty reduction, by contrast, is a unilateral administrative facility with no negotiation. The taxpayer accepts the penalty without challenging it in court or requesting settlement and pays it at a reduced rate fixed by law. To benefit, the taxpayer must act within 30 days of service of the penalty.

Although both routes involve payment and a reduction, settlement is far more flexible and open to negotiation. Because the parties negotiate, the reduction depends on the administration’s discretion and can often be more advantageous than the fixed rates; and in settlement, agreement may sometimes be reached on the tax itself, not only the penalty. In penalty reduction there is no negotiation or agreement with the administration; the rates are fixed by law and the administration has no discretion.

3. Objection to the tax penalty notice

Within 30 days of service, the taxpayer may either sue directly or object to the tax office that issued the notice. If there is an error in the penalty, the taxpayer may apply for its correction. Such errors include errors as to the person, the tax liability, the subject of the tax, the tax value or amount, and double taxation. Correction requests are subject to a five-year limitation period starting from the calendar year following the taxable event, after which they can no longer be made. If the objection is rejected, or not answered within 30 days, the taxpayer may sue at the tax court.

4. Annulment action at the tax court

The taxpayer may file an annulment action within 30 days of service of the notice. The tax court has jurisdiction, and the competent court is the tax court of the place where the tax office is located.

Before filing, the taxpayer must not have:

• applied for settlement (if a settlement is reached, the right to sue is lost);
• applied for penalty reduction (if the reduction is accepted, no action can be filed).

The objection described above, however, does not prevent a lawsuit, and a case may be filed without first using it.

Together with the annulment action, the taxpayer may ask for collection of the penalty to be stayed until the case is concluded. Under Article 27 of the Administrative Procedure Law, this is granted if there is a risk of damage that would be difficult or impossible to remedy and the penalty is clearly unlawful — both conditions must be met.

In the annulment action, the tax court examines whether the audit was carried out properly, whether the right of defence was respected, whether the assessment and penalty have a legal basis, whether there are calculation errors as to the type, amount or period of tax, and whether the notice was served in the proper form and time. The court reviews only the lawfulness of the administrative act, not its expediency.

If the court finds the notice unlawful, it annuls it: the penalty is not collected or, if already paid, is refunded. If it finds the act lawful, it dismisses the case and the notice remains valid. The court may also annul only part of the tax or penalty. The parties may appeal (istinaf) to the regional administrative court within 30 days, and decisions of the regional administrative court may, in certain cases, be appealed to the Council of State.

As seen, there are several alternatives against tax penalty notices, each with its own details. Support from an experienced lawyer is very helpful in avoiding any loss of rights.

Türker Law Office provides legal representation and advice on reviewing tax penalty notices, assessing remedies against tax loss, irregularity and special irregularity penalties, correction and other administrative applications, and annulment actions before the tax courts and related appeals.