Limitation Period for Tax Fraud

The offence of tax fraud in the meaning of § 370 Sec1 AO has been committed, if a taxpayer unlawfully reports wrong or incomplete information, fails to disclose facts or omits the use of tax control character or tax stamps.

In calculating the statute of limitations, a distinction must be made between the commencement, the duration and the suspension (re-commencement) of the limitation period.

Length of the statute of limitation:

The limitation period for criminal prosecution of tax fraud is five years (§ 78 Abs. 3 No. 4 Criminal Code).

Limitation period for particularly serious cases of tax fraud (§ 370 Abs. 2, 376 AO):

At the end of 2008, the legislator introduced tightened regulation (§ 276 AO) for the limitation period in criminal cases. The limitation period for particularly severe cases of tax fraud has been extended from 5 to 10 years. A particularly severe case of tax fraud has been committed, if the amount of taxes defrauded is significant or if a public servant has misused his position of authority for the purpose of committing tax fraud. Current judicature by the Federal High Court sets the benchmark for significance at € 50,000 (if money is literally “stolen” from the Tax Authority) and respectively € 100,000 for the case of non-imposition. It is important to note, that these figures refer to the tax payable per tax period (usually the calendar year) and not to the income (revenue). 

Practical note by the tax law specialist from Cologne: The regulation mentioned for particularly serious tax fraud results in the crime being time-barred after 20 years in exceptional cases. The limitation period of 10 years for criminal prosecution may be extended once by another ten years if, for example, a search is warrant by a judge (compare below: suspension). The new regulation of § 376 AO is only applicable, if the respective tax fraud was not time-barred on 25.12.2008.

Commencement of the statute of limitations for criminal prosecution

The limitation period for criminal prosecution commences with the completion of the deed (being tax fraud). Assessing the exact time of the deed requires a sophisticated analysis and must be assessed individually for each type of tax.  

In the case of income tax, the deed is finished as soon as the income tax assessment notice has been received. Example: If a tax notice for 2011 is received on 1.10.2012, criminal prosecution will be time-barred 5 years after this date (meaning 1.10.2017).  

The commencement date is controversial in the case of inheritance tax. In practice, the date on which the heir is obligated to report the inheritance is frequently used. This is three months after acceptance of the estate. Example: The heir to an estate of a testator deceased on 1.10.2012 must report the inheritance to the Tax Authority no later than 31.12.2012. The limitation period for criminal prosecution commences from this date (or three months later in other opinions).

The commencement date is also controversial in the case of gift tax. The legal interpretation supported by us posits, that the limitation period commences three months after a gift has been accepted, e.g. three months after a grandfather has made a gift to his grandchild.

Re-commencement of the limitation period (so-called suspension under § 78c StGB)

The limitation period re-commences, if certain procedural measures haven been taken. The law provides for a number of reasons for a re-commencement of the limitation period:

• commencement of criminal proceedings;
• the initial interrogation of an accused;
• a search warrant being issued by a judge.

The statute of limitation determines the period for which the Tax Authority is permitted to assess back taxes on the basis of a tax assessment notice. After this period has lapsed, tax assessment notice may not be issued or amended.

Duration of the limitation period for tax assessments:

The legislator distinguishes the duration of the limitation period for tax assessments as follows: it is 4 years for standard cases, 5 years for negligent tax evasion and 10 years for tax fraud (§ 169 Abs. 2 No. 2 lit 2 AO). 

Note by the tax attorney from Cologne:  Whether the Tax Authority is permitted to issue amended tax assessment notices for previous years depends on whether the incorrect or delayed tax assessment was caused culpably or not. Significant claims for the payment of back taxes will follow from gross negligence and wilful intent, whereby interest (6% p.a.) will have a significant impact on liquidity. Sample calculations by the press often omit the effect of interest. A tax fraud committed 10 years ago will attract 60% of interest. The burden of proof for gross negligence and wilful intent lies however with the Tax Authority. Wilful intent is always assumed in cases of foreign accounts with capital income. Exceptional cases (e.g. established unawareness of a foreign investment or unawareness of fictive income from non-transparent investment funds) may rule out wilful intent in certain circumstances.

Commencement of the limitation period for tax assessments

The limitation period for tax assessments generally commences with the expiry of the calendar year in which the tax liability was incurred. As far as a tax return must be submitted, the commencement does not begin until the end of the year in which the tax return is submitted. Example: If the holder of a foreign account submits an incomplete income tax return for the year 1999 to the Tax Authority in 2002, the limitation period of 10 years for 1999 will commence at the end of 2002. This means, that the Tax Authority may issue an amended tax assessment notice for 1999 until the end of 2012. If an incomplete income tax return for 2001 was submitted in 2003, the limitation period will commence at the end of 2003 and end on 31.12.2013.  

If the taxpayer fails to submit a tax return, the limitation period for tax assessments commences on expiry of the third year following the year in which the tax liability was incurred. Example:  If the holder of a foreign account fails to submit a tax return for 1999, the limitation period commences at the end of 2002 and ends on 31.12.2012.  

Extension of the limitation period or expiry suspension

The so-called expiry suspension means, that the regular expiry of the limitation period is suspended and the limitation period for tax assessments continues. This is the case, if an appeal was lodged in respect of a taxation period. The limitation period for tax assessments will then not expire before the appeal has been decided and is final.

Practical note in respect of the time-barring for tax fraud:  There are numerous types of expiry suspensions leading to a significant extension of the limitation period for tax assessments. One of them is a company tax audit. Individual cases differ widely and cannot be explained in detail. We recommend a personal consultation to achieve clarity for our client.

The Tax Authority may demand interest on unpaid taxes under § 235 Sec 1 AO, irrespective of a criminal conviction. The calculation base for the interest (6% p.a.) is the difference between the originally assessed lower tax debt and the retroactively assessed higher tax debt, which means the amount in which tax fraud has been committed. 

Interest commencement: Interest begins to accrue from the time the incorrect tax assessment notice was received. 

The interest on the unpaid taxes does however not lead to interest being imposed twice by adding them to the regular interest regime. Credit will be given for regular interest accrued.

The rules pertaining to the limitation period for criminal prosecution and tax assessment are important aspects in deciding, whether a voluntary self-disclosure is helpful or not.

If a tax offence is already time-barred under these rules, a voluntary self-disclosure will be futile. This is, because criminal prosecution is already time-barred.

A voluntary self-disclosure is only valid if it is complete, not barred by an estoppel and the back taxes have been paid in full, which is why it must be assessed in a first step which tax periods are not yet time-barred for criminal prosecution. These tax periods must be fully declared in a voluntary self-disclosure (obligation to completeness).

Sufficient liquidity for the payment of back taxes by the due date must be ensured. The limitation period for tax assessments must be considered for the respective years. If the back taxes assessed in amended tax assessment notices cannot be paid, it will void the voluntary self-disclosure. The voluntary self-disclosure may then be considered a mitigating circumstance in respect of the sentence handed down.

Note on interest on taxes withheld by tax fraud: The timely payment of interest is - contrary to the payment of back taxes - not a condition for the validity of a voluntary self-disclosure.

The discussion on statutes of limitation is completed by mentioning the limitation period applicable to the enforcement of tax debt. This period applies to the question of how long the Tax Authority may enforce an assessed tax debt (e.g. by way of seizure or garnishment). The limitation period is generally five years and commences on the date the debt is due for payment. This period is however irrelevant for advice in respect of a voluntary self-disclosure.