Commencement of Criminal Tax Proceedings During a Company Tax Audit

The tax auditor must make a statement to the effect, that the taxpayer is no longer obligated to cooperate in respect of the results of a company tax audit, as far as these might potentially be used in criminal proceedings (§ 393 Sec 1 AO in connection with § 10 Sec 1 S 4 BpO). This information must be recorded in the audit files including date and time and confirmed in writing if requested (§ 397 Abs 2 AO; § 10 Abs 1 S 5 BpO). The provision of an information leaflet at the start of the company tax audit does not suffice for this purpose. A failure of the tax auditor to inform the taxpayer of his rights always results in the information obtained this way being prohibited for exploitation in criminal proceedings (Federal Court 09.06.2009, case number 4 StR 170/09, NJW 2009, 3589 f.) The Federal Fiscal Court holds the contrary view, that no prohibition of exploitation for taxation purposes shall apply in these cases. The Federal Fiscal Court has expressly left open, whether a prohibition of exploitation in taxation matters applies in cases falling under § 136a StPO (i.e. in the case of deceit in respect of the right to remain silent). In our view, this is supported by the frequently ambiguous character of the investigation measures employed by a fiscal officer (both for taxation and criminal law).

If the taxpayer is subject to the initial suspicion of a tax offence, the tax auditor must immediately suspend the audit (§ 10 Sec 1 BpO). Unfortunately, the tax auditor usually fails to let the taxpayer know, that the matter has been referred to the tax inspection. The duty to suspend the tax audit means, the if the auditor informs the taxpayer of a suspension of the tax audit (even if only stated orally), it is a possible indicator for criminal proceedings being commenced. The duty to suspend the tax audit further applies, if the suspicion is directed at representatives of a company who are under a duty to cooperate ( i.e. the director of a limited liability company or the Executive Board of a corporation). The suspension of the tax audit continues until criminal proceedings have formally been commenced. It may be resumed afterwards. As a result, the criminal proceedings for tax offences and the company tax audit simultaneously continue in two separate proceedings.

These simultaneously conducted proceedings by the tax auditor and the tax investigations unit are a legally challenging issue. The rights and duties of the taxpayer are very different in each of these proceedings.

Because both proceedings are on foot simultaneously (company tax audit and criminal tax proceedings), the taxpayer is faced with the paradoxical situation, that he is entitled to remain silent in the criminal proceedings but has a duty to cooperate in the company tax audit.

The constitutional right of not having to self-incriminate in criminal proceedings applies to criminal tax law the same way it applies to general criminal law (statute of discretionary self-incrimination). All persons are entitled to remain silent. Remaining silent must however not result in negative conclusions for the assessment of factual issues, and not only the judge, but also the tax investigator are prohibited from drawing negative conclusions. For the taxpayer, this means, that he is under no obligation to give testimony in respect of the alleged tax fraud from the moment he has been notified of criminal proceedings for tax offences.

He remains the subject of the company tax audit and thereby the subject of taxation proceedings at the same time. His duty to cooperate under §§ 90 et sqq AO in this respect continues irrespective of the criminal proceedings. Maintaining strict silence in these circumstances will lead to negative ramifications and will be seen as a breach of the duty to cooperate. This breach then authorizes the tax auditor to e.g. perform an arbitrary assessment of tax bases as set out in § 162 Sec 2 AO. An arbitrary assessment is virtually never for the benefit of the taxpayer.

The known jurisprudence addressing this issue is entirely unsatisfactory from the taxpayer’s view. It was so far merely ruled, that a duty to cooperate in taxation matters, including company tax audits, must not be enforced by way of coercive measures after criminal tax proceedings have been commenced (§ 393 Sec 1 S 2 AO). In practice, a person served with an indictment for tax fraud is faced with the decision of what is more important to him: to avoid an arbitrary assessment in the company tax audit, or, if he remains silent, to avoid negative consequences for the criminal tax proceedings.

The accused should discuss his affairs with a tax attorney or a tax law specialist no later than at the time, at which a decision between either complying with the duty to cooperate or the right to remain silent has to be made. Only a tax lawyer is able to comprehensively explain the situation and provide the required information, which will form the basis for developing a joint strategy.

Rash decisions are usually poor decisions.

Even if each case is different, some general advice on possible actions can be given.

It makes little sense to continue cooperation during a company tax audit if the facts will lead to an arbitrary assessment of the tax bases by the tax auditor in any case. This is the case, if the company’s accounting is non-existent or entirely non-compliant. In these cases, the tax auditor will reject the accounts and arbitrarily assess the profits based on external parameters (e.g. the indicative rates schedule for company tax auditors). Such an arbitrary assessment may possibly have positive effects on the progress and the outcome of the criminal proceedings. In criminal tax proceedings, the general principle that a conviction must foot on the proven facts of the case applies, which means that arbitrary assessments do not serve as proven facts (Federal Court 11.12.52, case number 3 StR 69/52, BGHSt 3, 377 et sqq.). It must however be noted, that more recent jurisprudence emphasizes, that the judge may also base his judgement on arbitrary assessments. The judge must however scrutinize the arbitrary assessment and be convinced of its accuracy. This is where the tax attorney enters the stage and points the judge to the doubts and inaccuracies of the arbitrary assessment.

It is different in cases, where only one single transaction is queried by the tax auditor. A deductible operational expense initially declined by the tax auditor may be allowed following the deliberations of a tax lawyer/tax law specialist with experience in tax law, and thereby at the same time lead to a rebuttal of the tax fraud accusation.

In any case, your tax lawyer/tax law specialist should request full access to the case file after criminal proceedings for tax offences have been commenced. The notice of criminal tax proceedings being commenced sent to the taxpayer will only mention “tax fraud”. The notice will not contain information about the reasons behind the accusation, e.g. a foreign bank account, illegal proceeds or being dobbed-in by a third person. Only access to the case file will enable you and your tax lawyer/tax law specialist to determine the reasons behind the tax auditor's allegation. In many cases, access to the case file enables us to achieve a suspension of the tax audit for our clients. A corresponding follow-up by your tax lawyer/tax law specialist can be worth its weight in gold.