Correction of Income Tax Registration

According to section 168 AO, income tax registrations correspond to tax assessments subject to reservations. As a result, a sales tax return which is not submitted in time or the content of which is incorrect fulfils the criteria for the offence of tax fraud according to section 370 AO or, at least, the criteria for reckless tax reduction according to section 378 AO. 

In the context of the income tax registration procedure, the fact that this cannot be considered in isolation has to be taken into account. If the correction of an income tax registration results in a payment obligation, this involves income tax legislation and social insurance legislation consequences. As a rule, the premeditated evasion of income tax leads to the conclusion of social insurance fraud according to section 266a StGB since the amount of the social insurance contributions is based on earned income. 

LHP Note: If you establish a targeted understanding with the social insurance carrier, the accusation of a social insurance offence can often be alleviated or even remedied.

The declaration originally submitted plays a decisive role in this. The employer has to expect different consequences from the correction of his incorrect statements depending on the level of guilt (premeditation/recklessness/simple negligence). However, the level of guilt involved in this declaration can only be evaluated on the basis of the circumstances of the individual case. 

The offence of tax evasion requires premeditation. In this context, the fact has to be observed that premeditated tax evasion already applies if the perpetrator believes that success of the offence is possible and that he accepts this without actually focussing on ensuring such success (so-called unchariness).

Submitting a sales tax return which was not submitted in due time or the correction of a sales tax return the content of which was incorrect can form a so-called voluntary self-disclosure to avoid penalty which is then subject to the strict preconditions under section 371 AO. According to the case law of the Federal Supreme Court (5 StR 398/89), in criminal law respects, the submission of a correct sales tax annual return can have the effect of an effective self-disclosure (even) with regard to sales tax advance returns. 

LHP Note:It is important to remember that a voluntary self-disclosure is a personal disclosure. In contrast, a correcting declaration is a disclosure by an entrepreneur or a company (cf. the practical notes by our lawyer Dirk Beyer, NWB 20/2016 p. 1508 with regard to this). This differentiation is particularly important if the correcting declaration is submitted by a GmbH or an AG rather than by an individual entrepreneur since, in those cases, the self-disclosure would have to be submitted by the managing director rather than the entrepreneur (GmbH, AG). In the specific individual case, this has to be ensured by the tailor-made wording of the correcting declaration.

However, the legislator has created certain relieves for voluntary self-disclosure but has far from removed all pitfalls: For example, the requirement of completeness developed by the Federal Supreme Court (1 StR 577/09) under which all premeditated tax offences under one type of tax which have not become statute-barred have to be fully corrected no longer applies to intra-year sales tax advance returns following the introduction of section 371 sub-section 2a AO with the Act Amending the Fiscal Code. According to this, in cases of tax evasion as a result of the violation of the obligation to submit a complete or correct income tax registration, exemption from punishment is ensured to the full extent by correcting the incorrect information, supplementing the missing information or adding the omitted information for the fiscal authorities. Since the blocking reason of detection of the offence according to section 371 sub-section 2 AO does not apply in this respect, the so-called voluntary partial self-disclosures have also become effective again (in this respect). According to this, (theoretically) multiple corrections are possible again without any limitations. There is no obligation to submit an annual tax result which would prevent the option of correction - as in the case of the sales tax procedure. However, the correction of the income tax registration involves other risks preventing further correction options. In this respect, in particular, income tax field audits according to section 42f EStG and income tax inspections according to section 42g EStG have to be considered as important blocking reasons for further corrections of income tax registration.

Reckless tax reduction according to section 378 AO differs from tax evasion since, in contrast to tax evasion, it is not a criminal offence but simply an administrative offence. These offences are only differentiated with regard to the subjective aspects of the offence. While tax evasion requires premeditation, the mere implementation is sufficient for recklessness according to section 378 AO. According to the commonly used definition, whosoever does not apply the care required under the special circumstances of the individual case and his or her individual skills and expertise even though he/she should have known that his/her conduct would lead to a tax reduction acts recklessly (BFH/V R 44/13).

A correcting declaration regarding a reckless tax reduction constitutes a so-called voluntary self-disclosure to avoid a fine according to section 378 sub-section 3 AO. The conditions for such a statement are significantly milder than those for a voluntary self-disclosure to avoid penalty according to section 371 AO. In particular, the effectiveness of a voluntary self-disclosure to avoid a fine is not subject to the requirement of completeness according to section 371 sub-section 1 AO along with the risks entailed. Therefore, a voluntary self-disclosure to avoid a fine even permits a later correction by a further voluntary self-disclosure to avoid a fine as well as a penalty.

LHP Note:Even in the event of a reckless tax reduction, you should contact the social insurance carrier forthwith in order to avoid the accusation of social insurance fraud. In practice, the lawyer will often compile arguments that alleviate the level of guilt (at best, simple negligence or recklessness instead of premeditation).

Tax reductions which are not classified as being, at least, conditionally premeditated or grossly negligent, do not result in any penal sanctions or fines. In these cases, the parties concerned are only subject to tax correction requirements in accordance with section 153 AO. The correction declaration does not require any particular form in this. However, it should fulfil professional requirements. The consultation practice has shown that a decision on the type and manner of a correction is best taken in an individual case. For example, in some cases, the correction can be optimal in the form of tax declarations, while, in other cases, a tailor-made formulation is the best option. Under the provision in section 153 AO, the tax office has to be informed that a tax return is incorrect immediately after positive knowledge of the incorrectness (i.e. without undue delay). After this, the declaration must be corrected within an adequate period of time.

LHP Note:At least, the correction obligations also apply in cases of recklessness and unchariness under which positive knowledge of the incorrectness is only created after the declaration was submitted. The question of whether there are any additional declaration obligations is not answered clearly by the dominant view. If the employer wants to be on the safe side, he will, as a rule, choose the option of correction. Corresponding liquidity for the payment of tax arrears should be available at the earliest possible time.

LHP Note: This involves yet another pitfall: If the taxpayer does not fulfil his reporting requirements under section 153 AO, this can result in the accusation of tax evasion or tax reduction by failing to submit the correction.