Payroll Tax Field Audit

The payroll tax field audit is a field audit similar to a company tax audit. It is subject to a written audit notice by the Tax Authority (in this case the division for payroll tax field audits). The audit notice specifies the scope of payroll tax and periods to be audited. If discrepancies are discovered during the audit, the Tax Authority may extend the audited period.

• The payroll tax auditor will typically examine individual areas of priority, such as the treatment under taxation law of
• employment conditions of the owner or director;
• employment conditions of spouses or other family members;
• special payments, direct insurances or the use of company vehicles;
• pension commitments;
• The wages of temporary workers without hourly records and third party services are frequently investigated.

Last but not least, the payroll tax auditor will reconcile the total amount of wages liable for payroll tax with the amounts recorded in the accounting system under “wages and salaries” for the purpose of identifying any discrepancies.

If it becomes obvious, that a significant amount of clarification will be required, it is best to instruct a tax law specialist. Due to the specific professional qualifications needed, a reasonable remuneration must be allowed for an experienced tax law specialist. At the bottom line, this expenditure will be considered a good investment by the company owner, if the tax law specialist is able to assist him in tricky situations arising during a payroll tax field audit. On the basis of their practical experience, our tax law specialists in Cologne can efficiently assist company owners in the development of a strategy for payroll tax field audits and provide competent support during the audit. It is always helpful, if the adviser himself was formerly employed with the Tax Authority.

The company owner should inform his employees about the date on which the audit commences and sensitise them in respect of the manifold consequences that any conversation with the payroll tax field auditor may entail. Rash utterances in seemingly harmless conversations with the auditor may result in nasty surprises for the company. For example, a seemingly private conversation about the last company excursion may lead to the auditor assuming significant untaxed fringe benefits.

The company should assign a specific contact person, in order to channel the communication with the field editor. It needs to be decided on a case-by-case basis, if this person should only accept the auditor’s questions and convey them to the company management. This way, the management has enough time to consult with a tax law specialist and then respond to the auditor’s questions in an appropriate manner.

There are usually two weeks between the receipt of the audit notice and the actual commencement of the audit, which allows for adequate organisational preparations by the company, e.g. to prepare a workstation for the auditor. The documentation required in the payroll tax field audit should be collected ahead of the audit.

Comment by the tax law specialist: If the auditor initially foreshadows an audit over the telephone and no notice of audit has been sent yet, this provides a final window of opportunity to submit a voluntary self-disclosure which avoids a criminal penalty. A voluntary self-disclosure by the company is excluded once the notice of audit is received by the company or a culpable act becomes known to the Tax Authority by other means.

Our tax law specialists in Cologne assess the compliance of an audit notice with the law (if necessary in collaboration with the current tax adviser). Our tax law specialists can also work towards postponing the specified audit commencement date, if the company is unable to accept the audit date, i.e. due to special circumstances within the company.

The audit notice should in particular be assessed in respect of the following questions:

• Was the notice issued by the Tax Authority in charge for the respective business location?
• Does the audit notice bear the signature of the responsible officer?
• Have the tax records to be audited been properly specified in the audit notice?
• Has the employer been correctly identified?
• Has the name of the field auditor been provided?
• Is the audit notice limited to certain specified circumstances?

If the tax adviser or the tax law specialist is nominated as authorized agent, the Tax Authority will dispatch the audit notice to him.

Comment by the tax law specialist: The audit notice holds great significance for the factual delimitation of the audit. It is important, that the auditor conducts the audit exclusively in the company specified in the audit notice. This may be of particular relevance for group structures. Additionally, all audit measures may only refer to the period specified in the audit notice. Whether the Tax Authority is entitled to extend the period subject to the audit in light of established discrepancies remains a separate question. Our tax law specialists in Cologne will address these issues.

In addition to being aware of its duty to cooperate, the company should also be aware of its rights. The means of communication and the specification of persons in charge depends on the circumstances in each individual case. The company must also decide on a strategy (be it cooperative or confrontational).

Many clients decide in favour of a tax law specialist establishing early contact with the auditor while the audit is being conducted. This allows for the resolution of disputed issues in the early stages of the audit. The tax-lawyer can find out about the aims of the auditor and advice his client in respect of his conduct towards the auditor. If the auditor displays inappropriate personal behaviour, the tax-lawyer will take care of this as well.

Regular interim conferences offer the benefit of not having to deal with all the “piled up” disputed issues in the final conference. The final conference may then be anticipated in a relaxed attitude.

If the auditor suddenly and unexpectedly ceases his audit or does not show up any more, this may be an indication that the matter has been referred to the Office for Fines and Criminal Matters (Straf- und Bußgeldsachenstelle). The auditor has then possibly formed a view, that tax fraud has been committed. Assistance by a competent defence lawyer for tax matters is urgently advised. 
Our tax law specialists in Cologne act as defence tax-lawyers for clients in criminal tax matters.

The tax audit is usually concluded by a final conference and the subsequent issuance of liability notices and amended tax assessments. The final conference provides the company with an opportunity, to present its views in attendance of the Tax Authority’s Division Manager and to explore options for settlement. The Division Manager is the superior officer of the tax auditor and is authorized to make final decisions, such as entering into a so-called factual agreement. A factual agreement lends itself for resolution, if an issue is difficult to assess in finality and both sides desire for this issue to be agreed. This may be the case e.g. in issues concerned with the amount of wages/salaries paid. Our tax law specialists in Cologne represent employers in final conferences and draft respective factual agreements. Great care must be taken to avoid any negative consequences in respect of criminal tax proceedings. This is part of the daily business of a tax law specialist instructed to act in criminal matters relating to tax fraud.

Based on the audit report, the Tax Authority will issue new payroll tax assessment notices and back tax liability notices to the employer. The employer may lodge an objection against these notices within one month. Objections have no effect as to a stay of execution, which means that an application for a stay including suitable substantiation must be submitted at the same time.

Comment by the tax adviser: Employers should note, that a notice of tax liability which does not include a payment due date must also be objected against within one month. It does not suffice to object against a letter of demand issued at a later time.