The asymmetrical tax treatment of accounting error correction: need for a rethink

published on 18 October 2022 | reading time approx. 5 minutes

As has already been noted (see “Correzione degli errori contabili semplificata anche ai fini IRAP” of 23 July 2022 and “Errori contabili con rilevanza fiscale nell’anno della correzione” of 22 June 2022), the article 8, paragraph 1, letter b) of Legislative Decree 73/2022 (the so-called “Semplificazioni” Decree) amended the article 83, paragraph 1, of the TUIR, with reference to the tax treatment of income components recognised following the correction of accounting errors, “simplifications decree”, amended Article 83, paragraph 1 of the TUIR, with reference to the tax treatment of income components recognised arising from the correction of accounting errors.

This provision aim to simplify the ways to give tax evidence of errors made.

In the past, the tax authorities held the opinion that the correction of an accounting error relating to a previous year should not affect the economic result of the year when the error was discovered and detected.

This approach, set out in Circular No. 31/2013, was based on some Supreme Court sentences claiming the mandatory nature of the accrual principle.

In particular, it is held that the taxpayer was not allowed to choose the tax period of the year to deduct a cost, as it must necessarily follow the provisions of Article 109 of the TUIR (see, the judgments of the Court of Cassation No. 1648 of 24 January 2013; No. 10981 of 13 May 2009; No. 16819 of 30 July 2007; No. 24474 of 17 November 2006 and No. 16198 of 27 December 2001).

Therefore, applying the principles of Circular No. 31/2013 and taking into account the lengthening of the time period for submitting “favourable” tax returns introduced by DL 193/2016, a complex system of submitting “cascading” supplementary returns was set up to bring out the positive or negative income component in the correct year of accrual, reassessing the taxes due for all subsequent years with the amendments made to Article 83 of the TUIR by DL 73/2022, this procedure is no longer necessary.

Making a radical simplification of the matter, the legislator introduced a further derogation to the tax accrual principle, stating that for the correction of accounting errors, the accrual year is no longer the original year when the assumption of the income component occurred, but the year when the error is detected.

This leads to three useful results for taxpayers:

the submission of cascading supplementary declarations is avoided;
the statutory financial year result is aligned with the fiscal year result;
penalties for the late declaration of positive components are not applicable - at least, this seems to be the conclusion - as long as there is no dispute by the tax auditors before the tax return for the year of the error is filed.

The above mentioned provisions are in line with the penal system introduced by Legislative Decree No. 472/97: an unintentional error that has been remedied before the tax authorities are even aware of it should not be punishable (Articles 5 and 6 of the Legislative Decree).

However, the rule carries a non-neutral provision, appearing to overlook the general principles of tax law (i.e., the taxpayer's power to pay and the requirement of tax assessment periods expiration).

In fact, negative components may only be deducted in the year of detection if the deadline for the supplementary declaration has not expired, whereas positive components are taxed in the declaration of the year of detection of the error regardless of whether they relate to years concerning which the deadlines for the tax assessment have expired.

This discrepancy of treatment between negative and positive components leads to a situation that could be highly penalizing for taxpayers, allowing the tax authorities to potentially revise upwards the income of tax periods that would otherwise have been closed.

In fact, during the assessment, the Agency could come across a positive component of income not declared for a lapsed tax year but attributable to an accounting error that was recognizable in the tax year being verified.

The new text of Article 83 of the TUIR does not merely affect the procedural aspect (that instead seems to have guided the legislator), but actually affects the temporal competence of the error by allocating it to the financial year when it was (or could have been, let us say) detected, the risk to be avoided being that objections may be raised for the year under audit that would otherwise no longer be raised.

The same risk is highlighted by Federholding in its Note No. 5/2022.

At this point, it might be useful to consider whether the changes made to Article 83 are really favorable to the taxpayer.

On the one hand, the process of correcting errors has been simplified, but on the other hand, the changing of the deadlines depending on the sign of the income item (positive or negative) relating to the correction risks exposing the taxpayer to excessive unpredictability and uncertainty due to the theoretical infinite duration of the assessment period, with the attendant problems in the event of a possible defence (e.g., for example, assessments for errors relating to tax periods for which the documentation is no longer available because the retention period has expired).

In our opinion, it would be better, therefore, to amend the rule by regulating errors in the same way, regardless of their algebraic sign.