Tax audit with a tax adviser

Key takeaways:

• A tax audit (Betriebsprüfung) does not necessarily have to be handled with a tax adviser, but the adviser is the key to an audit that is safe and predictable – without one, the effort, the error rate and the risk all rise considerably.
• The tax adviser reduces the risk of additional tax and penalties, manages communication with the tax office and takes over day-to-day conduct of the audit.
• The tax adviser ensures that you comply with all your duties to cooperate, but say and do nothing that worsens your position under tax law or criminal law.

Do you need the support of a tax adviser in a tax audit?

A tax adviser is not legally required, but is in practice indispensable for handling the tax audit in an orderly and legally secure manner. During a tax audit you have to comply with duties to cooperate, examine the legal assessment of the findings, observe time limits and decide strategically when to lodge an appeal, apply for a suspension of enforcement or later bring proceedings before the tax court – tasks that are difficult to master without a specialist adviser, even for experienced entrepreneurs.

A tax adviser supports you as follows:

• Reducing risks: A tax adviser reduces the risk of high back taxes, incorrect estimates and later criminal tax proceedings, and creates concrete room for manoeuvre. A typical risk is an incorrect determination of the facts by the tax office – for example where cash deposits from private assets are treated as undeclared business income. Estimates under section 162 of the Fiscal Code (AO) are equally critical, where only turnover is adjusted to the company's detriment but costs are not estimated alongside it, or where structures typical of the sector are ignored; such estimates quickly lead to substantial additional tax. A tax adviser challenges this by working up the actual tax position, documenting the items called into question and correcting excessive estimates. The adviser identifies errors of law, such as the incorrect application of tax provisions or the disregard of case law of the highest courts.
• Professional communication: The aim must be to represent the taxpayer's interests firmly while defusing conflicts with the tax office during the audit itself. Tax disputes are costly and, in particular, tie up considerable capacity on the side of the taxpaying company. A tax adviser or lawyer has experience in representing interests professionally, but also keeps a constructive channel of communication with the auditors open in situations of conflict.
• Identifying criminal law aspects: If matters are discovered in the course of the audit that could be treated as tax evasion (Steuerhinterziehung), fines or custodial sentences of up to five years are possible, and up to ten years in particularly serious cases. A tax adviser – ideally together with a specialist lawyer – helps to distinguish mistakes from intentional conduct, to make back payments in good time and to develop a defence strategy that makes a fine, or even a discontinuation of the proceedings, possible.

How does a tax audit proceed?

The tax audit begins with an audit order and ends with amended assessments; at every stage a tax adviser can materially influence the outcome.

• Audit order: The tax office orders a tax audit (strictly speaking: an external audit, Außenprüfung) in writing, names the types of tax, the period and the legal bases, frequently states the intended start of the audit, and includes information on the available legal remedies.
• During the audit: As a rule the audit takes place on your business premises or those of your adviser. In the case of smaller businesses it is conducted without any physical presence at your premises or your adviser's. You have to provide information, submit documents and grant access to your IT systems. During the audit the auditor may examine matters both in your favour and to your detriment, and is required to inform you of material findings and their tax consequences where this does not jeopardise the purpose of the audit – this is the right moment to counter with factual objections and documents.
• Closing meeting: Before amended assessments are issued, a closing meeting (Schlussbesprechung) typically takes place at which the results are discussed; this is decisive for your position, because final clarifications and compromises are possible here.
• Issue of assessments: Once the audit is complete, the tax office issues the assessments; the one-month appeal period runs from notification.

A tax adviser coordinates the entire process: preparing documents and audit records, accompanying discussions with the auditor, drawing up minutes of the closing meeting, examining the assessments from a legal perspective and lodging an appeal in good time – including parallel applications for a suspension of enforcement (Aussetzung der Vollziehung) where high back payments jeopardise liquidity.

What tasks does the tax adviser specifically take on in a tax audit?

The tax adviser is your project manager for the tax audit: they take on the technical, legal and strategic management of the entire process:

• Preparing for the audit: Reviewing your accounts and contracts, correcting obvious errors, preparing documents in an orderly fashion and producing internal overviews of critical matters.
• During the audit the adviser organises compliance with your duties to cooperate – the orderly submission of receipts, the provision of electronic data, the coordination of information given – and ensures that the auditor does not take any disproportionate or objectively unjustified steps.
• On contested points the adviser prepares legal submissions, refers to the legislation and the case law and prevents preliminary findings from being adopted into the audit report unchecked.
• At the closing meeting the adviser formulates your objections in a structured way, documents them and ensures that the facts are recorded completely and correctly.
• After the audit the adviser examines the assessments issued on the basis of the audit report, identifies points open to challenge and prepares a well-founded appeal with clear arguments on the facts and the law; at the same time – where liquidity shortages loom – the adviser coordinates applications for a suspension of enforcement or for deferral, in order to manage the payment burden in tax and economic terms.

How should you react to an unannounced tax audit – and what may (and must) be done?

In the case of unannounced audits, spontaneous visits or measures under criminal tax law, you should cooperate but immediately channel all communication through your adviser.

• Examine official measures closely: Every official measure should be examined for its lawfulness. Where an audit order exists, you must in principle allow the auditor into your business and operating premises, make documents accessible and provide factual information. The same applies in principle to criminal investigative measures or a cash register inspection.
• Coordinate communication closely: Despite a valid audit order, you should not give any information off the cuff without first consulting your tax adviser, and in particular not on subjective assessments or possible errors.
• Have criminal law aspects clarified immediately: As soon as you have indications of a criminal law dimension – for example a letter from the fines and criminal matters office or from the tax investigation department – it is important to bring in specialist advice immediately and to make no statements on the substance before a coordinated strategy is in place. In parallel, it should be examined whether a voluntary disclosure with exemption from penalty (strafbefreiende Selbstanzeige) is still possible; from the notification of an audit order for particular types of tax and periods, a voluntary disclosure is barred to that extent, while other types of tax or periods may still be covered.

In this pressured situation, the tax adviser ensures that your statutory obligations are met without unnecessarily worsening your legal position, and coordinates – together with a criminal defence lawyer – all further steps, from communication with the tax office through to possible appeals and applications for interim legal protection.