Deloitte: Risk Minimization in Tax Audits

Deloitte Legal has published guidance on minimizing risks associated with tax audits, particularly concerning potential criminal and administrative penalty proceedings. The guidance emphasizes the importance of proactive measures from the outset and throughout the audit process.

The initial audit order itself can reveal risks even before the audit begins. Sometimes, the periods under review may extend beyond the normal statute of limitations for assessment changes, where adjustments are only possible in cases of gross understatement of tax or tax evasion. Furthermore, tax authorities might incorrectly determine a foreign company to have a permanent establishment in Germany, leading to unlimited tax liability.

During the course of an audit, situations can arise that prompt the initiation of criminal proceedings. This might occur if tax authorities request unusual documents or information not directly related to tax bases, but rather to facts potentially relevant to violations of supervisory or organizational duties, or tax evasion. Incorrect or self-incriminating answers from employees can exacerbate the situation.

Deloitte Legal recommends appropriate training and the implementation of a special process, which can be integrated into an existing tax compliance management system. Such a process guides employees in identifying and avoiding risks, from the initial notification of an upcoming audit to the evaluation of the audit report. This not only promotes an efficient audit but also minimizes criminal and administrative risks, including those related to new regulations under German tax law (AO § 153 (4)).

The recommended process includes agreeing with tax authorities on how future corrections under AO § 153 will be handled. The aim is to reduce the risk of accusations of tax evasion stemming from the failure to report a correction immediately.