Compliance & Investigations
Risk of tax criminal proceedings in wage tax audits – fines to replace interest?
In recent years the risk of a criminal investigation for alleged tax fraud has risen significantly for businesses in Germany. While tax authorities used to initiate tax criminal proceedings only against hardened criminals such as participants in VAT carrousel frauds, they have lately also begun to initiate criminal proceedings more frequently in cases in which no criminal tax offence was committed.
Tax authorities are legally obliged to initiate criminal proceedings when they suspect a tax offence. In reality, they like to use criminal proceedings as a means of exerting pressure on taxpayers. This happens in the course of tax audits, for example, if the business under audit fails to cooperate sufficiently and the auditor wishes to build up pressure.
We therefore advise our clients to prepare for tax audits diligently and always make the auditors feel that they are the client's highest priority. At the latest when specific tax-related questions arise, the client should seek to engage with the auditor directly to discuss disputed matters and - if necessary – to involve a tax advisor. This can prevent the auditor from initiating criminal proceedings due to an impression that the client has something to hide.
Recently, it has been noted that German tax authorities increasingly initiate criminal proceedings after or even during wage tax audits if the audits lead to additional taxes. The reason behind this trend is the fact that with wage tax there is no interest on back taxes – as opposed to corporate tax, trade tax and VAT. If a tax audit leads to additional corporate income or trade taxes, such taxes must be paid plus interest. But if a wage tax audit leads to additional tax claims, the taxpayer only needs to pay the "net" amount without any interest. The tax authorities are apparently seeking to compensate for this "loss" by assessing penalty payments or administrative fines in criminal proceedings. In this context, they regularly disregard the question of whether the taxpayer had acted intentionally (as is required for criminal charges) or recklessly (as is required for misdemeanour charges). So far we have only observed this conduct in connection with wage tax audits, but it remains to be seen whether tax authorities will expand this strategy in the future to other taxes which do not bear interest, such as real estate transfer tax or capital gains tax.
Such methods, which have the sole aim of compensating for lost interest payments, would be unlawful but they are impossible to prove in practice. In such cases we would recommend consulting a lawyer who is not only skilled in tax law, but can also cover the criminal law aspects of the case. This should be considered at the latest when criminal proceedings have already been initiated, but might also be advisable if it becomes clear that a wage audit will lead to a considerable increase in taxes.