Italian Tax Compliance Failures
If you have failed to file an Italian annual income tax return (dichiarazione omesso) when it was due, failed to make payment of taxes by due or failed to comply with your Italian obligations then the ramifications can be serious. Leaving sleeping dogs to lie is usually not the best approach as interest and penalties increase as time goes on, and deadlines for e.g appealing against assessments for compliance failures can become final with the passage of time allowing no scope to present opposition to claims made by the Authorities.
In general terms it is important to understand that the Italian income tax system works, for individuals, on a tax year (calendar year) by tax year basis. Assessments to recover back tax, and/or apply failure to file penalties work on a particular tax year, and must be issued within the applicable deadlines under Italian law.
Action to be taken
In general the steps to be taken when presented to be taken when presented with a case of failure to comply with Italian tax rules are as follows:
Identify the tax year or tax years in play
The first step is to determine on the basis of the appliable facts and circumstances, what Italian tax years are at risk to assessment for non compliance.
Identify proceedings taken by the Italian Tax Agency
A crcuail inital step is to review any copies of correspodnce issued by the Italian tax authorities regarding your position.
Determine if the taxpayer was tax resident in Italy for the relevant years
If the taxpayer met any of the four tests of tax residence for any applicable tax year then they will be liable to Italian taxes on worldwide income and assets for that tax year. They should have filed an annual tax return for the year, unless entitled to exemption.They should also have reported the existence and value of foreign assets, if any, in annual tax return.
A crucial element in the residence analysis is determining if a taxpayer was registered with the Anagrafe for the greater part of any relevant tax year. Precise details of the dates of registration and de-registration are essential in anlysing prior year tax liabilties and possibly missed complaince deadlines – if you do not have copies of correspondence with the Comune, a historic certificate of residence (certificato di residenza storico) should be obtained from the relevant Comune.
Determine if a DTA has any impact on the Tax Residence postion
Many of Italy’s double tax treaties (DTA’s) contain specific provisions to avoid double taxation in cases of dual residence. If you qualify as a tax resident of another country which has a DTA with Italy, then the DTA can, if the facts and circumstances justify, operate to make you tax resident in that other country. This is a complex analysis and the DTA will likely only apply, if it applies at all, if you had your main home outside Italy and/or your centre of vital interests for the greater part of any relevant tax year. If you have been registered as resident with the Anagrafe for any part of a relevant tax year, the Tax Agency may start from the position that having declared an address in Italy as what you consider to be your centre of vital interests/habitual abode, then a DTA should not apply to make you non Italian tax resident.
Not Italian Tax Resident
Even if you were not tax resident of Italy for any past year you may have had income which was liable to be reported on the grounds that it is considered Italian source income. If you were registered for VAT in Italy then an annual return is always due, and you are generally required to comply with the usual VAT compliance obligations (e.g electronic invoicing, Intrastat filings, periodical VAT payments, where due) whether you were tax reisdent in Italy for any year or not.
Determine the Taxes due for each Tax Year
Starting from the analysis of a taxpayer’s residence position, and a determination of what should have been done to comply with Italian tax law, the next step is to calculate any unpaid. Whilst a rough estimate can be made, in order to calculate the tax, late payment penalties and interest, it is is usually necessary to prepare a tax return for each tax year.
To Late File or Not to Late File
An Italian annual income tax return which is not filed by the due date is considered “omitted”. The due date is 30 September following the end of the income year, although recent years have seen extensions to this deadline, and there is a statutory 90 day extension from the due due, with a fixed late filing penalty. After that 90 day extension, the return is considered anyway to be “omitted”, and late filing will make no difference to that “omitted” status. Penalties, based on the tax due, will always apply for failure to file.
Late filing is generally advised as it can operate to reduce reduce penalties. In some cases it may be worthwhile contacting the Tax Agency and receiving guidance on the easiest way to resolve a delinquent filing/tax payment position.
Special considerations for those registered for VAT
- Electronic invoicing (SDI)
- Failure to invoice with VAT and pay that VAT to the Tax Agency
- Intrastat Filings (for intra EU supplies)
- Social Security Contributions
- Eligibility for Regime Forfettario (the Regime applies only if you are Italian tax resident for the year or if other conditions are met.
Penalty exposure
The Italian penalty regime is intricate. Here are some points by way of rough guidelines, but specific advice should always be sought.
Income taxes
Late Return (Dichiarazione Tardiva)
A late return is return is one which is filed within the 90 day window after the statutory deadline for filing
Omitted return:
Standard Penalty:120%–240% of tax due
If tax is fully paid before assessment: reduced to fixed €250–€1,000
Late Payment penalties:
Standard: ~30% of unpaid tax – can be reduced by Ravvedimento Operoso
Failure to Report Foreign Assets
Italy’s rules requiring reporting of foreign assets and
VAT (only if relevant)
Omitted VAT return:
120% of VAT due (min €250)
Late Payment penalties:
Standard: ~30% of unpaid tax – can be reduced by Ravvedimento Operoso procedure
Criminal sanctions
- Triggered if:
omitted declaration + tax > €50k - Other taxpayer behaviour involving fraud
Social Security (only if relevant)
Omitted VAT return: 120% of VAT due (min €250)
Late Payment penalties:
Standard: ~30% of unpaid tax – can be reduced by Ravvedimento Operoso procedure
Interest
Interest will apply in all cases on late paid tax (both annual balances and possibly payments on account). See this post for applicable interest rates.
Conclusion
If handled correctly full payment + late filing before audit can:
- eliminate criminal exposure
- reduce penalties to manageable amounts
- possibly reduce professional fees and costs for preparation of past returns – if the Tax Agency agree and are willing to issue an assessment based on taxpayer information without a return.
This is a recoverable situation, not uncommon. The point is that taking action as soon as you realise that there is a delinquent position is better, in terms of accessing reduced penalties, compared to waiting for action to be taken by the Tax Agency.