Learn 8 basic points about tax discrepancy in individuals

1. Tax discrepancy:

The article states that individuals may be subject to a tax discrepancy procedure when it is found that the amount of expenditures in a given year exceeds the income they have declared or should have declared. These expenses include:

• Expenses.
• Acquisition of goods.
• Deposits into bank accounts.
• Financial investments.
• Credit cards.

This means that if an individual, for example, has a lifestyle, level of spending, or makes investments that do not seem to correspond with their declared income, the SAT (Mexico's tax authority) may initiate a review to assess whether there is undeclared or under-reported income.

2. Presumption of taxable income:

The article establishes that if expenditures are not properly justified, they are presumed to be taxable income. This is especially relevant for those who:

• They are not registered in the RFC (Federal Taxpayer Registry).
• Are registered but do not file mandatory returns.
• Declare income lower than the detected expenditures.

For example, if a person has significant bank deposits or purchases expensive goods without having declared income to justify such purchases, those expenditures will be treated as if they came from undeclared income, and the corresponding tax will be applied.

3. Exclusions from presumed taxable income:

The article also sets forth important exceptions. The following deposits will not be considered expenditures:

• Deposits in accounts that are not the taxpayer's own.
• Deposits for the acquisition of goods or services, or for leasing property.
• Transfers between the taxpayer's own accounts or to accounts of close family members (spouse, ascendants, or descendants in a direct line).

These cases will not be considered taxable income, provided the taxpayer can demonstrate their nature. This provides some flexibility, but the burden is on the taxpayer to provide relevant evidence.

4. Determination of omitted income:

Unexplained income derived from this procedure will be considered as omitted income. This means that:

• If the taxpayer does not justify the origin of the funds used for the detected expenditures, it is presumed that these funds come from taxable income.
• This omitted income will be classified according to the taxpayer's main activity or as other income, as applicable.
• Additionally, if the taxpayer is not registered in the RFC, the tax authorities will register them under Chapter II, Section I, Title IV, which regulates income from business and professional activities.

5. Powers of the tax authorities:

To determine the amount of expenditures, the SAT may use any information at its disposal, including:

• Internal files and databases.
• Information provided by third parties (such as banks, companies, or other institutions).

This provision grants broad authority to tax authorities to collect and use information regarding the taxpayer's financial operations.

6. Procedure for the taxpayer:

The article specifies a procedure that grants certain rights to the taxpayer:

• Tax authorities must formally notify the taxpayer of the amount of expenditures detected, the information used, and the resulting discrepancy.
• The taxpayer has 20 days to respond and clarify the source of the funds used for the expenditures, presenting the necessary evidence.
• If the clarification is insufficient, the unexplained expenditures will be presumed to be taxable income, and the corresponding taxes will be assessed.

This process ensures that the taxpayer has the opportunity to defend themselves and provide evidence before the tax authorities conclude that there was undeclared income.

7. Conclusion of the procedure:

If, after the analysis, it is determined that there was indeed omitted income, the tax authorities will issue an assessment based on the rates in Article 152 of the Income Tax Law (ISR), which establishes the applicable percentages for calculating the annual income tax for individuals.

8. Practical implications:

This article is a crucial tool for the SAT to detect inconsistencies between declared income and the lifestyle or expenses of individuals. It promotes transparency in tax returns, discouraging taxpayers from under-reporting income or failing to meet their tax obligations. At the same time, it sets up a formal defense process for taxpayers who can justify the origin of the resources used.

The tax discrepancy procedure is particularly relevant in cases where there is an obvious mismatch between income and expenditures (such as in cases of tax evasion), but it may also raise concerns among honest taxpayers who do not keep strict control of their personal finances.

In summary, Article 91 is a powerful tool for the SAT to combat tax evasion, but it also requires that taxpayers maintain detailed records of their expenses and income, especially when making significant or unusual expenditures.