If you are self-employed or own a business in Spain, one of your biggest fears is being investigated by the Tax Agency (aka the Hacienda).
The body is notorious for handing out hefty fines for the smallest of errors, and thanks to its increasing digitialisation, its ability to detect mistakes is only growing stronger.
To help you avoid an audit, a former enforcer at the Hacienda has lifted the lid on some of the biggest ‘red flag’ activities that could trigger an investigation.
Emilio Baena spent more than a decade working inside the system and knows first-hand the criteria that can lead to an inspection.
The signs that trigger an inspection
In a LinkedIn post, Emilio explains that during his years at the Tax Agency the work was far more manual.
Paper files and individual reviews were part of daily life. But today, he says, things have changed completely.
The Agency relies on advanced technologies such as big data and artificial intelligence to process millions of data points in real time.
‘There’s no need for an inspector to go through your case one by one. An algorithm does it, 24/7,’ he says.
Every taxpayer, whether an individual or a company, has a fiscal risk profile, which works as an internal score that’s constantly updated according to detected financial movements.
This profile is key, as once it passes a certain threshold, an alert is generated and an automatic review begins, or even a formal inspection.
According to Emilio, several of these ‘red flags’ can almost guarantee an investigation. These include:
- Spending that doesn’t match your declared income. For example, earning €1,500 a month while paying a mortgage, travelling often, buying a new car and eating out every week.
- Transfers between accounts without a clear explanation, especially movements between relatives or friends that don’t fit with your declared income.
- Use of cryptocurrencies or frequent international transactions, which tend to be of particular interest to the Tax Agency.
- Heavy use of cash, especially when spending patterns don’t line up with what’s been declared.
- Invoices with unusual patterns, such as a high number of sales without VAT applied, or when the invoice numbers and dates are out of sync (each invoice must be filed with a number and in correct chronological order)
- Appearing in international records, such as on lists of partners in foreign companies.
Under the new system, every purchase, investment and bank movement is recorded and feeds the algorithm that decides whether you should be inspected.
This means that the margin for error or oversight, which might once have gone unnoticed, can now put you under scrutiny with a single click.
This is why Emilio warns that seemingly harmless mistakes in how you report or declare income can be read as fraud, even when there’s no intention behind them.
He wrote: ‘An inspection doesn’t only cost you money; it takes your time, blocks your resources and steals your peace of mind.’
Read more Spain news at the Spanish Eye.
