Correction of Sales Tax Returns

According to section 168 AO, a sales tax return corresponds 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. 

The declaration originally submitted plays a decisive role in this. The entrepreneur 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.

Since the German Federal Supreme Court ruling of May 20th, 2010 (1 StR 577/09), the so-called requirement of completeness has applied. Factually, the effectiveness of a voluntary self-disclosure requires that all premeditated tax offences regarding one tax type which have not become statute-barred must be corrected in full. This means a kind of “life-time confession” is required in a combined overall correction. Therefore, both the taxable sales as well as the advance tax have to be specified correctly with regard to the sales tax. However, since January 1st, 2015, an exemption from this has applied according to section 371 sub-section 2a sentences 1 and 3 AO. This legal relief has made so-called partial voluntary disclosures into effect again (in this respect) unless there are other blocking reasons within the meaning of section 371 sub-section 2 AO. This means that (theoretically) sales tax advance returns can be corrected any number of times. However, under the current legal situation, the previously common corporate practice under which corrections used to be accepted in advance and carried out repeatedly, can lead to ineffective self-disclosures for various reasons. For example, a surprising sales tax inspection now constitutes a blocking reason for voluntary disclosures. This means a correction no longer avoids a penalty. 

As regards time, the statute of limitation for prosecution is decisive for the requirement of completion in the first place. Therefore, the statute of limitation for prosecution has to be determined first for the correction of a sales tax return in order to determine the time range of the combined correction. In this respect, we have to consider, in particular, the aggravating reason of extensive tax reduction according to section 370 sub-section 3 sentence 2 no. 1 AO which involves an extension of the statute of limitation under criminal law to ten years in accordance with section 376 sub-section 1 AO. 

From January 1st, 2015 onwards, the combined correction for voluntary self-disclosures was extended significantly by the revision of section 371 sub-section 1 sentence 2 AO. Since then, a so-called minimum deadline has applied which extends the combined correction to, at least, ten calendar years.

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. Specifically, 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. 

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. Our consultation practice has shown that, in some cases, the correction is 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 (i.e. without undue delay). After this, the declaration must be corrected within an adequate period of time. 

LHP note: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.