Tax evasion despite a tax adviser: what matters now

Key takeaways:

• Even with a tax adviser you can be held liable for tax evasion if you deliberately conceal income or assets or cause incorrect statements to be made.
• The tax adviser may additionally be liable under civil and professional law – they become criminally liable only where they actively participate in the evasion themselves.
• In many cases the allegation of deliberate evasion can be limited to gross negligence (a reckless understatement of tax) – which rules out higher fines and a custodial sentence.
• An early defence, full clarification of the facts and – where still possible – a properly prepared voluntary disclosure are the most important levers for limiting the damage.

Can I be criminally liable for tax evasion despite having a tax adviser?

Even where you are advised by a tax adviser, it is possible to become criminally liable for tax evasion. A tax adviser does not automatically protect you from the allegation. What is decisive is whether you are yourself responsible for knowingly incorrect or incomplete statements to the tax office. There are three typical constellations here:

• Concealment: Concealing income from the tax adviser. If, for example, you deliberately fail to mention rental income, foreign assets or secondary activities although you know that these are relevant for tax purposes, you are acting intentionally – irrespective of who technically prepares the return. The adviser can work only with the information they receive from you. If you conceal material facts, the criminal responsibility remains with you.

Example: You have a securities account abroad with annual investment income. The tax adviser expressly asks about foreign assets in their questionnaire. You leave the relevant line blank although you know about the account. Here too the return is formally "from the tax adviser", but the deliberate incompleteness comes from you.

• Ignoring recommendations: Ignoring the tax adviser's recommendations (in particular on questions of residence). The responsibility likewise lies with you where the tax adviser's advice is ignored. This applies in particular to questions of the residence of companies. Put simply, the issue is whether holding companies are actually tax-resident in the chosen low-tax country and not, after all, in Germany. This presupposes that the place of management is genuinely in the other country and not in Germany. That can only be achieved with employed executives from outside the family, or with regular travel.

Example: An entrepreneurial family bundles its real estate and investment portfolio in a holding company in an EU member state with very low corporate income tax (for example Cyprus). On paper there is an office there; in reality it is a service provider that administers hundreds of companies without exercising any genuine management functions. All strategic decisions are taken by the patriarch and his family office in Germany. Emails also show that decisions are to be taken from Germany, bypassing the holding company. The concept developed by the tax adviser (managers vested with decision-making authority, family members travelling to board meetings in Cyprus) is ignored. The place of management is therefore evidently not in Cyprus but in Germany.

• Joint tax evasion: Tax evasion committed jointly with the tax adviser, or at least with their assistance.

Example: A tax adviser develops, together with his client, the concept for a "VAT carousel". A VAT carousel is a fraudulent chain model within the VAT system in which several (often cross-border) companies trade goods or services among themselves in order to obtain refunds of input VAT without actually paying the corresponding VAT to the state. One participant – the so-called missing trader – disappears after showing VAT on invoices but never remitting it, while other participants have the input VAT from those invoices refunded to them. In the end the state suffers the loss, because it pays out input VAT without ever receiving the corresponding output VAT. The tax adviser assists by fabricating the accounts for the carousel companies, recording fictitious turnover and filing preliminary VAT returns and annual returns.

Important: Conversely, an adviser who is properly involved can strengthen your position: if you hand over all documents in full, answer follow-up questions openly and expressly ask for a lawful structure, much speaks against the allegation that you "took your chances" on an understatement of tax. The defence then focuses on bringing out that absence of intent.

When does an error by the tax adviser amount to tax evasion by the client?

The decisive difference is whether the client wanted to save tax and was aware that the information was incorrect, or whether they relied on professional advice in complex questions and thereby breached duties of care. In the first case there is tax evasion; in the second, merely a reckless understatement of tax.

One speaks of tax evasion where you at least accept incorrect statements. A typical constellation: you know that certain income is taxable but expressly tell your adviser to "leave it out", or do not mention it at all.

A reckless understatement of tax exists where you grossly disregard tax obligations without intending to deceive. That can be the case where, for example, you classify a complicated foreign shareholding incorrectly, sign a return prepared by a third party without checking it, or ignore warning signs, without setting out to evade tax. Here an administrative fine is in prospect rather than a criminal conviction – an important difference for the certificate of good conduct, professional prospects and personal reputation.

Errors by the tax adviser can influence this distinction: where the legal position is difficult, your information was complete and you were entitled to rely on the assessment, this can speak against intent. If, by contrast, you actively pressed for risky "arrangements" or ignored obvious inconsistencies, responsibility is not simply shifted onto the adviser.

What consequences do the client and the tax adviser face in a tax evasion case?

For you as the client, three things are at stake: payment of the tax, additional financial burdens and a possible penalty.

The tax authorities claim the underpaid tax in full, retrospectively for up to ten years. Interest is added (typically 6 % per year) and, where applicable, late payment penalties – the total frequently lies considerably above what would have arisen on a correct return. Depending on the amount understated and the precise circumstances, a fine or a custodial sentence is in prospect, in serious cases with several years' imprisonment without suspension.

The tax adviser has to be considered separately:

• Under criminal law they become vulnerable themselves only where they actively participate in the evasion – for instance through knowingly false returns or involvement in concealment structures.
• Independently of that, they can be liable in damages to the client: where the tax adviser has breached professional duties of care, they must compensate your financial loss (additional tax, interest, and where applicable penalties) in whole or in part.
• Under professional law, measures up to and including withdrawal of their licence are possible where their conduct shakes confidence in the proper exercise of the profession.

What is decisive for you: even where the adviser is liable, the tax assessment and the criminal law assessment rest in the first instance on you personally. Civil claims against the adviser are a further step, but not a shield in the criminal proceedings.

How can I defend myself if the tax adviser was involved?

The aim of every defence is to defuse the allegation and limit the consequences – ideally to the point of avoiding a custodial sentence or a conviction altogether. The most important starting points are:

• Calling intent into question: The task is to show that you relied on professional advice and did not intend any deliberate deception. Emails, minutes of meetings, checklists and complete documents help to evidence your willingness to cooperate with the adviser and the tax office. The more clearly it can be seen that you wanted transparency, the more readily evasion can be turned into a "mere" grossly negligent understatement.
• Reducing the amount understated: The specific sum is one of the most important factors for the level of the penalty. Even a few thousand euros of difference can determine whether a particularly serious case is assumed or whether a fine is still in prospect. A clean recalculation, the correction of excessive estimates and the recognition of all permissible expenses are therefore central.
• Making good the loss: Anyone who pays the tax, interest and surcharges as early and as fully as possible shows active repentance. In many cases this reduces the sentence and can – particularly with smaller amounts – make a discontinuation subject to conditions or a moderate fine possible.
• Confession and procedural strategy: A coordinated, credible approach to making statements is generally more valuable than rigidly denying obvious facts. In some constellations a public main hearing and the risk of a lengthy custodial sentence can be avoided through a negotiated agreement, a penalty order or a discontinuation against payment.

The earlier a specialist defence lawyer is involved – ideally as soon as the first letters from the fines and criminal matters office arrive, or on a search – the greater the room for manoeuvre. Ill-considered statements from the initial phase can scarcely be corrected later.

Can a voluntary disclosure help if a tax adviser was already involved?

Yes, a voluntary disclosure can help even where a tax adviser was already involved. The fact that your previous returns went through a tax adviser does not preclude a voluntary disclosure. All that matters is whether the statutory requirements can be met today.

With an effective voluntary disclosure you can avoid prosecution for tax evasion entirely – even where substantial amounts are involved. For that, the following requirements in particular must be met:

• all previously undeclared matters must be disclosed (all types of income, accounts, contracts, foreign structures),
• all the years concerned for which the criminal limitation period has not yet expired must be covered,
• all the relevant types of tax must be included (for example income tax, corporate income tax, VAT),
• tax, interest and – in the case of larger amounts – any surcharges must be paid in full.

Grounds of exclusion are problematic: if, for example, a tax audit has already been ordered or criminal proceedings opened, the exempting effect falls away. A later "voluntary disclosure" then has only a mitigating effect.

It is precisely here that the role of the existing tax adviser matters greatly: they can supply important information but may themselves be affected. It is therefore regularly sensible to have an independent team specialising in criminal law examine the overall situation and prepare the voluntary disclosure – where possible – in substance and form so that no gaps remain.

Are tax advisers obliged to report their clients' tax evasion?

Tax advisers are not obliged to report tax evasion. They may in principle not disclose client confidences. They also enjoy rights to refuse to give evidence vis-à-vis the criminal authorities.

A reputable tax adviser or lawyer who discovers tax evasion by a client will, however, as a rule first press for a voluntary disclosure (where possible) and, if the client does not wish to make one, resign the engagement. This applies in particular where the tax evasion goes back several years and they took over the engagement from a colleague.