Fines for tax evasion

Key takeaways:

• A fine for tax evasion is possible where the court classifies your culpability as low to moderate – above all where the amounts evaded are lower and there are no previous convictions.
• From around EUR 50,000 to 100,000 of evaded tax the risk of a custodial sentence rises considerably, and from EUR 1,000,000 only a custodial sentence regularly comes into consideration, often without suspension (exceptional cases aside).
• Through an early defence, cooperation and – where still possible – an effective voluntary disclosure, you can considerably improve the chance of a fine or even of avoiding a conviction altogether.

I. Is a fine possible for tax evasion?

Tax evasion is punished either by a fine or by a custodial sentence of up to five years, and up to ten years in particularly serious cases. The penalty depends essentially on the amount evaded and on the further circumstances of the individual case. In principle, a custodial sentence is in Germany a last resort; this follows from the principle that the harm inflicted on the offender should be kept as low as possible. Short custodial sentences in particular are to be avoided, because they too frequently destroy a person's civil existence (work or business, relationship, family, social standing) entirely.

The fine, by contrast – particularly in tax and white-collar criminal law – is the most frequent sanction. It is intended to intrude on a person's assets noticeably but without destroying their livelihood. The aim is to make clear that the offence does not pay.

This is also reflected in the "daily rate system": the fine is made up of two factors: the number of daily rates (in principle 5 to 360), which reflects the seriousness of the culpability, and the amount of the daily rate (EUR 1 to 30,000), which is based on the personal and economic circumstances of the offender. The aim is that the penalty should be felt equally by the wealthy and the less well-off.

II. When does tax evasion result in a fine?

A fine therefore comes into consideration in particular where the court assesses the culpability as rather low to moderate. There must also be no particularly serious case (section 370(3) AO); a fine is no longer provided for by the law in such cases. 

On the basis of the case law, the following groups of cases can be identified in which a fine is typically imposed and no custodial sentence follows: 

• Amount evaded in the lower or middle range: The amount evaded is one of the weightiest criteria for the courts. The Federal Court of Justice has held that a particularly serious case of tax evasion (section 370(3) no. 1 of the Fiscal Code) exists at any rate where the offender has evaded more than EUR 50,000 in tax. Up to around EUR 50,000 of evaded tax, a fine is therefore regularly imposed. In the range of roughly EUR 50,000 to 100,000 of evaded tax, the offender must be able to point to many mitigating circumstances in order to avoid a custodial sentence (that is, make a confession, pay the evaded tax immediately, and have no relevant previous convictions).
• A limited period of offending / no system: The shorter the period and the fewer assessment periods affected, the more readily the conduct will be regarded as a self-contained lapse – rather than a "tax model" practised over years. The period of offending is generally connected with the manner of proceeding: organised conduct that is planned and designed to last is to be classified differently from an isolated or situational act committed out of a crisis. An example: a self-employed engineer fails, on a single occasion, to declare the fee for one assignment in his tax return while he is in the middle of divorce proceedings. In case of doubt this is more likely to lead to a fine than if he had systematically feigned business expenses over years by forging subcontractors' invoices.
• No relevant previous convictions: Anyone who has already been punished for tax evasion and evades tax again runs a considerably greater risk of a custodial sentence rather than merely a fine. Someone who has already come to the attention of the criminal justice system displays (depending on the nature of the previous convictions) a "limited attachment to the law" – they appear not to take the law seriously. That weighs in aggravation, in particular in the case of relevant previous convictions (for example earlier tax evasion, white-collar crime, fraud). In constellations in which a fine would still be conceivable for a first-time offender (for example lower or medium amounts, no systematic evasion), relevant previous convictions can mean that a fine is no longer regarded as sufficient and that a custodial sentence is imposed instead (possibly suspended).
• Making good the loss: Making good the loss immediately (that is, paying the evaded tax in full, including interest and surcharges) is a mitigating sentencing factor and can tip the balance in favour of a fine in borderline cases, but under the case law its influence is clearly limited. The Federal Court of Justice emphasises in its case law that the offender is here merely settling the tax debt that they would have had to pay in any event. Payment of the tax does gain weight, however, where it went hand in hand with personal restrictions or "sacrifices" (for example the sale of assets in order to be able to pay the tax).
• Confession and cooperation: A confession is a very weighty mitigating factor and can be decisive for the question of a fine or a custodial sentence. The earlier and more comprehensive the confession, the stronger its effect. An early confession (for example early in the investigation, rather than only after being confronted with overwhelming evidence) demonstrates a genuine willingness to cooperate and saves the courts and the tax authorities considerable effort. A comprehensive confession with a full account of the facts and cooperation in establishing the amounts increases its weight as a mitigating factor still further. A late, merely partial or obviously tactical confession has a considerably weaker mitigating effect. An example: a freelance engineer failed to declare fees over several years and thereby evaded around EUR 100,000 in tax in total. During the investigation the evasion is initially vehemently denied. Only after the engineer is confronted with bank records and statements from employees does he admit the allegations. Such a confession – after denying the allegations and after being confronted with overwhelming evidence – carries considerably less weight.
• Personal circumstances: Personal circumstances can have a mitigating or an aggravating effect. These include, among other things, illness, age, inexperience in tax matters and level of education. Where an inheritance from abroad is not declared by someone who is themselves seriously ill and has no professional connection whatsoever with tax law, this is to be weighted differently from the same inheritance being concealed by a young tax adviser. 

III. How high is the fine for tax evasion?

The fine is determined in two stages. Its level depends on the number of daily rates and on the amount of each daily rate. With this system the fine pursues the aim of taking account both of the seriousness of the culpability and of the economic capacity of the person convicted.

Two factors are decisive in assessing a fine under the daily rate system: the number of daily rates and the amount of an individual daily rate.

The number of daily rates expresses the seriousness of the culpability. In law this range runs from 5 to 360 daily rates. From a conviction of 90 daily rates or more, a person is regarded as having a criminal record, which matters in particular for the certificate of good conduct and for the entry in the register.

The amount of the individual daily rate, by contrast, is based on the economic circumstances of the person convicted, in particular on their average net income per day. The starting point is usually the monthly net income divided by 30. The range runs from at least EUR 1 up to EUR 30,000 per daily rate.

An example: if someone has a monthly net income of EUR 10,000, the daily rate is EUR 10,000 divided by 30, that is, around EUR 333. If the court sets 120 daily rates, the fine is 120 times EUR 333, that is, EUR 39,960.

IV. How is a fine achieved in a tax evasion case?

The aim of the defence is either to obtain a discontinuation of the proceedings, to secure a fine instead of a custodial sentence, or – where a custodial sentence is imposed – to make its suspension possible.

Key building blocks for this are the earliest possible involvement of a lawyer, which prevents premature or ill-considered statements being made to the tax investigation department or the police. The files should first be inspected in order to develop a coordinated defence strategy on that basis.

Building on this, the careful working-up of the actual tax position is of central importance. This includes in particular establishing the amounts actually evaded and correcting any excessive estimates made by the tax authorities.

A further important point is making good the loss, ideally by paying the amounts owed as fully and as promptly as possible. Where immediate payment in full is not possible, workable instalment arrangements can be agreed in order nevertheless to document positive post-offence conduct.

There is also the confession and the conduct of the proceedings: an early, consistent statement can lead to a noticeable reduction in the sentence. Procedural economy, that is, avoiding lengthy taking of evidence through a confessing and cooperative attitude, is also taken into account positively in sentencing.

Finally, working out exculpatory circumstances matters. These can include, for instance, being overwhelmed rather than practising planned deception, incorrect advice, or particular personal pressures.

Through the interplay of these factors, the sentence can be pushed towards a fine, the number of daily rates reduced and, in the case of custodial sentences, the chance of a suspended sentence considerably improved

V. What role does voluntary disclosure play in avoiding a fine?

An effective voluntary disclosure can – provided all the requirements are met – mean that no criminal conviction follows despite the tax evasion having been completed. Even in a case of large-scale tax evasion in which a custodial sentence is in prospect, imprisonment can thereby be reliably avoided.

The core points of an effective voluntary disclosure are in particular completeness, timeliness and payment in full of the amounts owed. As regards completeness, it is necessary that all previously undeclared matters and assessment periods are disclosed, in so far as they are not yet time-barred. All the types of tax concerned must also be covered, so that the voluntary disclosure can have its exempting effect.

For timeliness, it is decisive that the offence is not yet "obviously" known to the authorities. Certain official measures – for example a search that has already begun, or the notification of an audit order in certain constellations – can mean that the exempting effect of the voluntary disclosure is barred.

VI. When does tax evasion exist?

Tax evasion exists where incorrect or incomplete statements are made to the tax office or where a required return is not filed at all. As a consequence, tax is not assessed or collected, or is assessed or collected too low or too late, or tax advantages are granted without justification. In addition, the person acting must act intentionally, that is, they know of the understatement of tax or at least accept it.

Typical examples are deliberately undeclared secondary income or rental income, turnover systematically entered too low in the cash book, company expenses declared as "private" without any actual business purpose, or the targeted shifting of profits to foreign accounts in order to conceal the true tax burden.