Risk minimization in tax audits

Reducing the risk of the initiation of penalty and criminal tax proceedings in connection with a tax field audit

Already with the receipt of the audit order, a risk of the initiation of administrative fine and criminal tax proceedings may be revealed. An audit order may cover audit periods for which the “normal” assessment period has already expired and which can only be changed if there is a case of reckless understatement of tax or tax evasion. In addition, it may, for example, emerge from an audit order that the tax authorities, contrary to the opinion of the company's legal representatives, consider a non-German company to be based in Germany and assume unlimited tax liability instead of limited tax liability.

But even during the course of a tax audit, numerous situations arise that may give rise to the prospect of a possible initiation of criminal proceedings. For example, if the tax audit requests unusual documents or information that do not relate to the tax bases themselves, but to facts that may be relevant for a possible realization of an administrative fine – including a violation of a supervisory or organizational duty within the meaning of section 130 OWiG (German Administrative Offences Act) – or tax evasion. It is not uncommon for taxpayers to cause the risk of the initiation of administrative fine and criminal tax proceedings themselves, for example by describing such facts when answering audit questions without necessity, by explaining, for example, in a misleading or self-incriminating manner why certain tax errors occurred.

Therefore, it is important that employees of a tax or accounting department who are available to provide information during a tax audit are aware of and/or able to recognize possible risks in order to avoid them or, if necessary, to be able to react appropriately.

To make this possible, we recommend appropriate training and the implementation of a special process that can also be integrated into an existing tax compliance management system. A detailed process description should show the responsible employees which options for action are available from the first call of the tax audit to announce a future tax audit to the evaluation of the tax audit report, which not only promote an efficient course of the tax audit, but can also minimize risks under criminal tax law and administrative fine law – including in connection with the new regulation of section 153 (4) AO (German General Tax Code).

The process should include, for example, an agreement with the tax authorities on how to deal with any necessary future corrections in accordance with section 153 AO with regard to the tax audit period and other periods, in order to reduce the risk of being accused of tax evasion by failing to report a correction immediately.

Published: October 2024