How does Spain’s tax agency detect fraud?

The tax system can be very complicated in Spain and difficult to get your head but that doesn't mean you won't be fined for not declaring your earnings as you should be or even trying to defraud them.

Perhaps you’re not properly declaring income from abroad, maybe you’re working in Spain while on the non-lucrative visa or perhaps you’re doing casual job here and get paid under the table?

Whether you’re deliberately committing fraud or doing it unwittingly because you don’t understand all the rules, all these are very risky because the Hacienda, Spain’s tax agency has many ways of finding out.

According to data from the Ministry of Finance's Technical Union, the underground economy represents more than €200 billion in Spain, equivalent to more than 15 percent of the Gross Domestic Product (GDP). This is why fraud detection is such as big business here and why the authorities have implemented lots of different methods to find out.

Cash withdrawals and deposits are reported

All cash withdrawals and deposits over €3,000 are reported by banks and other financial institutions. This both helps combat fraud and money laundering. For example, if you’re only declaring €2,000 in earnings, yet you’re depositing €3,000 in cash into your account every month, there are going to be some questions asked. The same goes with withdrawing large amounts if there’s no record of what it’s being spent on or if it’s being used to pay other employees under the table.

FACT CHECK: No, Spain does not fine you for withdrawing €3,000

Activities are closely monitored, especially those of the self-employed

People working in certain sectors are more closely monitored than others. The is particularly true if you’re self-employed. And if your business involves many small cash payments, the authorities will scrutinise your tax returns and accounts even more to make sure you’re declaring absolutely everything and not pocketing any that they’re not aware of.

Artificial Intelligence tools

AI and big data are being used with increasing frequency by the Hacienda. They can be used to monitor tax returns, payments you’re making and even check water and electricity consumption bills to make sure you’re not renting out a property and not declaring the income. AI-based technological tools are used most frequently, however, when looking at the yearly Income Tax Campaign. The computers learn if you’ve made mistakes or entered amounts and then tried to modify them later on.

Scrutinising your income tax returns

Income tax returns are closely looked at in order to identify taxpayers who make recurring errors and fail to account for some of their income. This is sometimes done by AI and sometimes by those who work for the agency.

READ ALSO: What are the fines and prison sentences for tax evasion in Spain?

Identifying false non-residents

The Tax Agency also looks carefully at those claiming to be non-residents, but who actually spend more than 183 days here or have their families or main centres of economic interest in Spain. One way they do this is by looking at the location of electronic devices belonging to suspicious self-employed individuals and businesses. They also analyse family relationships, where you spend your money and what on. They even look at data from tolls to see how many times cars have been crossing the border.

AI technologies identifying false non-residents allowed the Tax Agency to recover €24.5 million in tax defrauded funds from 69 taxpayers in 2021 who were actually resident here.

READ ALSO: How does Spain know if I'm a tax resident?

Social media

Sometimes, the Tax Agency will even look at the social media accounts of suspicious individuals that are on their radars. For example, do you look like you’re living beyond your means? Are you posting work you’ve done but haven’t declared? Or are you often posting from Spain even though you claim to be a non-resident here?

Cross-referencing

If you are a landlord and you’re not declaring your rental income for example, the authorities will look at which properties you own and cross-reference your income with tenant's income tax returns. Those who don’t register their deposits properly will also raise a red flag.

Looking at your expenses

It is also considered to be fraud if you are claiming back lots of expenses which you shouldn’t be. For example, if you’re self-employed, you can claim business related expenses, such as business trips, computers for business use, a proportion of your utility bills if you work from home, uniforms you need for work etc. If you’re trying to claim holidays as business trips though, software used for gaming and everyday clothes, the Tax Agency can find out and you could be fined. The authorities will look closely at all your reported expenses to see if they’re deemed necessary for your work and you may even have to justify them.

Identification of fake employment contracts and shell companies

This point particularly applies to those who apply for the Beckham Law, which allows certain people who work for companies outside of Spain to pay a flat rate of 24 percent tax. Many people want to take advantage of this tax benefit and so they make up conditions or create companies in order to qualify. This can include fake contracts with businesses and shell companies, which are legally incorporated companies which really exist in name only.

READ ALSO: What Americans should know about Spain's Beckham Law tax regime