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Federal Court of Justice overturns estimation based on standard rates – Case No. X R 19/21
\r\nDuring a tax audit, additional assessments by the tax office may occur. The statutory provisions, in particular the Tax Audit Regulations, form the basis for estimations within the scope of a tax audit. An estimation constitutes a significant interference with the taxpayer’s rights and is governed by legal requirements. Tax assessments and possible additional tax payments can result directly from an estimation and often have considerable financial effects. There are different types of tax audits, which vary according to company size, industry, or type of audit. The prerequisites and the legal framework for estimations are clearly defined and must be complied with. In the course of the tax audit, the bookkeeping is reviewed, and changes may occur if discrepancies are identified. In doing so, according to a ruling of the Federal Fiscal Court dated 18 June 2025 (Case No. X R 19/21), auditors may no longer automatically make flat-rate estimations on the basis of industry figures from the so-called standard-rate compilation (Richtsatzsammlung). During a tax audit, the question of the plausibility of the bookkeeping often arises and is examined closely by the auditors. Instead, preference should be given to an internal company comparison.\r\n\r\nIn principle, the tax authorities are entitled to make estimations if the taxpayer’s bookkeeping is not proper. Tax audits may affect both companies and various persons such as the self-employed, freelancers, and private individuals. In the case of deficient, incomplete, or implausible bookkeeping records, the auditor can estimate the tax base pursuant to Section 162 of the Fiscal Code (AO). For this purpose, so-called benchmark values are often used. In many cases, this is disadvantageous for the taxpayer. The BFH is now departing from this common practice and favors an individual calculation of the tax base, according to the business law firm MTR Legal Rechtsanwälte, which, among other things, provides advice in tax law.\r\n
Introduction to the tax audit
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What is a tax audit?
\r\nA tax audit is a central instrument of the tax administration to ensure the proper assessment of taxes for companies. The tax office, or also the German Pension Insurance, carries out these audits regularly to check whether all tax obligations in the relevant period have been correctly fulfilled. An external audit is the most common form of tax audit; it is conducted by the tax office and other authorities in the field. Above all, it constitutes a comprehensive, company-wide review of all tax-relevant circumstances and affects the company as a whole. Within the framework of a tax audit, various tax-relevant matters, such as liquidity reviews, are examined closely. There are different types of tax audits, which differ according to type of tax, company size, or competent authority. Various authorities, in particular tax offices and customs authorities, play a central role in conducting these audits and in monitoring finances in the context of public administration.\r\n
Why is preparation for the tax audit so important?
\r\nFor companies, preparing for a tax audit is of great importance in order to avoid unnecessary trouble and unexpected surprises. Freelancers and self-employed persons are also regularly affected by tax audits and must meet special requirements in this context, for example with regard to procedural documentation and electronic data transmission. Transparent and well-documented business processes, as well as a complete collection of all relevant documents, make the tax office’s review considerably easier. Support from a tax advisor is extremely helpful at all stages of the tax audit, since the tax advisor plays a central role in preparing, organizing, and conducting the audit and can minimize risks. Involving the tax advisor also provides legal certainty and optimal preparation for the authorities’ requirements. It may also be sensible to invest a little more time in documentation and preparation in order to ensure a smooth process. During the audit, there is an obligation to cooperate: companies must provide the auditor with all requested documents and information. Those who take these requirements seriously and prepare in good time can usually get through the tax audit smoothly and without major complications.\r\n\r\n \r\n
Reasons for a tax audit
\r\nA tax audit may be ordered by the tax office or the German Pension Insurance for various reasons. Common triggers are inconsistencies or anomalies in the tax return, such as unexplained fluctuations in turnover or profits, late tax payments, or a conspicuous development of company figures compared to previous years. Repeated errors in tax returns or an accumulation of reports and information from third parties can also cause the tax administration to initiate a tax audit. In Germany, various tax offices are responsible for conducting tax audits, with the selection of companies to be audited being based on certain criteria. Companies should therefore always ensure that their tax returns are prepared correctly and completely in order to minimize the risk of a tax audit. The tax administration also uses modern analytical methods to detect potential anomalies at an early stage and to audit them in a targeted manner.\r\n
Procedure of a Tax Audit
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Initial phase and organization of the tax audit
\r\nThe procedure of a tax audit follows a clear scheme that companies should be familiar with in order to be optimally prepared. At the beginning, the company receives an official audit order from the tax office, which specifies the exact period, the start, and the place of the audit. As part of the audit order, the tax auditor’s visit to the company is also announced; organizational aspects such as scheduling, access to documents, and compliance with deadlines must be observed. The significance of the audit period is that all relevant tax matters within this period are reviewed; the determination of the period for the tax audit is generally based on turnover or profit. The audit itself may proceed differently depending on the type and size of the company. The focus is on the company’s tax circumstances, in particular VAT, wage tax, trade tax, corporate income tax, and explicitly also wage tax.\r\n
Audit contents and final report
\r\nDuring the audit, the tax auditor reviews the documents submitted and checks various matters in order to verify the accuracy of the information provided. In certain cases, the auditor may also carry out an on-site inspection in order to gain an impression of the operational processes. After completion of the audit, the tax office prepares a written report in which the results and any findings are listed in detail. If the company does not agree with the outcome, it has the option of filing an objection to the findings.\r\n\r\nThe duration of a tax audit depends significantly on the size and complexity of the company. While smaller businesses are often audited within a few days, the audit at larger companies can extend over several weeks or even months. Careful preparation and having all required documents ready help to speed up the process and avoid unpleasant surprises.\r\n
Rights and obligations during a tax audit
\r\nDuring a tax audit, companies have both rights and obligations, serving the interest of a fair and transparent audit process. One of the most important rights is the right to information: companies must be informed in good time about the audit period, the scope of the audit, and the planned measures. There is also the right to review the results of the audit and to ask follow-up questions in the event of ambiguities. On the other hand, there is an obligation to cooperate: companies are required to submit all requested documents completely and on time and to answer the auditor’s questions truthfully. The Fiscal Code (AO) regulates these rights and obligations in detail and provides the framework for the conduct of tax audits by the tax offices in Germany. Anyone who takes the duty to cooperate seriously and has the necessary documents ready can make the audit process easier and avoid unpleasant surprises.\r\n
Cash Register Inspection
\r\nThe cash register inspection is a special instrument used by the tax administration to review proper cash management in companies. It is generally carried out without prior notice by the tax office and focuses on examining the cash records and receipts. The aim is to ensure that VAT is correctly calculated and remitted and that cash management complies with statutory requirements. Companies are obliged to keep their cash records complete and verifiable, as inconsistencies or missing receipts can quickly give rise to suspicion of tax evasion. The cash register inspection is an important component of the tax audit and can also be carried out by the German Pension Insurance. In Germany, clear provisions and rules apply to the conduct of cash register inspections, which companies should strictly observe in order to avoid sanctions or back payments.\r\n
German Pension Insurance and tax audits
\r\nIn addition to the tax office, the German Pension Insurance is also authorized to conduct audits at companies. The focus of these audits is the correct remittance of social security contributions for employees. The German Pension Insurance checks whether the company’s contribution payments and supporting evidence have been provided completely and properly. Incorrect or late payments can lead to additional claims and, where applicable, fines. Companies should therefore place great importance on careful and punctual remittance of social security contributions. The close cooperation between the German Pension Insurance and the tax offices in Germany ensures that discrepancies can be identified and remedied quickly. Good preparation for the audit and proper documentation of all relevant records are also the best protection here against unpleasant consequences.\r\n
Additional assessment by the tax office
\r\nIn the underlying case, the tax office objected to the bookkeeping of a nightclub owner as formally non-compliant. The nightclub constitutes a business that is subject to a tax audit and review by the tax office. Specifically, up to five open cash registers were in use in the nightclub. Turnover was recorded on slips of paper and passed on to the accounting department. In addition to the classic vouchers, other items such as contracts, invoices and incoming invoices must also be presented as part of the tax audit; in addition, evidence may also be provided by other means, or other tax constellations may be relevant. In the course of a tax audit, there may also be a cash inspection or special audits, in particular in the area of wage tax and other types of tax. During the auditor’s review of the bookkeeping, it is important to respond to the questions asked by the tax auditors and to clarify open issues in order to avoid misunderstandings and additional estimations. Due to the deficient bookkeeping, the tax office made substantial additional estimations.\r\n\r\nAfter the nightclub owner filed suit, the Hamburg Fiscal Court confirmed the tax office’s authority to estimate. It justified this on the grounds that the cash slips did not reflect the actual cash balance. For the traceability of bookkeeping and to avoid additional estimations, the proper collection and archiving of documents is indispensable. The Fiscal Court made its own estimate. Based on an external business comparison, it assumed a gross profit markup of 300 percent and relied on the official guideline rate collection for the catering industry.\r\n
Federal Fiscal Court: Prefer internal business comparison when estimating
\r\nIn the appeal proceedings, however, the Federal Fiscal Court reached a different assessment. The BFH emphasized that in cash-intensive businesses such as a nightclub, deficiencies in cash management and bookkeeping can entitle the tax authorities to make estimates. In doing so, the tax authorities are also, in principle, free to choose their estimation method. However, the choice of estimation method is governed by the tax audit regulations and the applicable provisions, which set out the legal requirements and the framework for review and amendment by the auditors. Where several estimation methods are possible, preference should be given to the more accurate variant. The internal business comparison should therefore generally be preferred over the external business comparison, according to the BFH. In doing so, the BFH made clear its doubts as to whether the official guideline rate collection, in its current form, constitutes a suitable basis for a business comparison.\r\n\r\nThe BFH confirmed that, in the present case, the cash management was deficient and the tax authorities were entitled to estimate. However, it criticized the estimation method. The Fiscal Court had based its estimate solely on an external business comparison and, for this purpose, had applied a gross profit markup of 300 percent on the basis of the official guideline rate collection for catering businesses. The Fiscal Court had not, however, explained in a comprehensible manner why the trade class “catering” and this specific guideline rate value had been applied. A nightclub cannot readily be assigned to any of the trade classes shown in the guideline rate collection, the BFH made clear. Furthermore, it had also not been shown that the specific value was selected from the range of guideline rates taking into account the particularities of the individual case.\r\n
Doubts about the tax office’s guideline rate collection
\r\nIn addition, the BFH questioned the data quality and methodological quality of the guideline rate collection itself: there was a lack of information on random sampling and representativeness, and it was unclear in particular why loss-making businesses were generally excluded. This could allow for systematic distortion.\r\n\r\nIn addition, there are very wide ranges within the trade classes. This makes a comprehensible justification for the selected value all the more important, particularly with regard to the amount of the determined estimated figures, the BFH made clear.\r\n
Choosing the appropriate method in tax audits by the tax office
\r\nWhere several estimation methods are possible, a recalculation based on internal business data is more reliable than an external comparison with average values. In the case at issue as well, a recalculation based on cost of goods sold would have been more obvious because internal data were available and thus an internal business comparison would have been possible. The BFH therefore remitted the case to the Fiscal Court for renewed examination.\r\n\r\nThe judgment makes clear that, in the case of deficient cash management and bookkeeping, additional estimations by the tax authorities may be justified. However, the BFH also makes clear that the appropriate method must be chosen and that a flat-rate estimate based on guideline rate values is subordinate to an internal business comparison. The aim of the tax audit is to achieve a comprehensible and correct result based on a suitable estimation method. The frequency and intensity of tax audits is significantly higher, particularly for large businesses with high turnover and profit, as these companies are classified by the tax authorities as particularly relevant for auditing. In addition, the classification of a business by country and company size can influence the audit frequency and the choice of estimation method. Professional preparation and the selection of the right estimation method can help secure profits and avoid financial disadvantages such as back taxes or penalty payments.\r\n\r\n \r\n
Digital tax audit
\r\nDigital tax audits are on the rise in Germany and are changing the way tax offices and companies conduct tax audits. By using modern technologies, processes are made more efficient and the submission of documents and tax-relevant data is simplified. The transmission of tax returns and other tax-relevant data is often carried out via the ELSTER system, which enables digital and automated communication between taxpayers and tax authorities. Companies can provide their accounting records, tax returns, and other documents electronically, which not only saves time but also increases the traceability of the audit. For the tax offices, this means they can access the relevant information more quickly and in a more targeted manner and conduct the audit in a more structured way. Digital tax audits thus help modernize cooperation between companies and the tax administration and improve the quality of audits.\r\n
Advantages of the Digital Tax Audit
\r\nThe shift to digital tax audits brings numerous advantages for companies and tax offices. One of the biggest benefits is increased efficiency: all relevant documents and data can be transmitted digitally, which significantly reduces the workload involved in the audit. Digital notifications and messages between companies and the tax office further speed up the audit process, as appointments, requests, or results can be transmitted quickly and formally. Transparency is increased because all steps and information within the scope of the audit are electronically documented and stored in a traceable manner. The error rate also decreases, as the digital transmission and archiving of data and documents minimizes transfer errors. For companies and tax offices, this also means cost savings, as less time and fewer resources have to be spent on organizing and carrying out the audit. Last but not least, the digital tax audit promotes better cooperation, as information and data can be exchanged quickly and easily between the parties involved.\r\n
Challenges of the Digital Tax Audit
\r\nDespite all the advantages, the digital tax audit also entails some challenges that companies and tax offices must take into account. A key issue is data security: it must be ensured that all sensitive data and documents are protected during the audit. In addition, the compatibility of the systems used is crucial so that the exchange of data between companies and the tax administration runs smoothly. For a successful digital audit, it is also necessary that all parties involved—both on the company side and at the tax offices—are appropriately trained and familiar with the new processes.\r\n\r\nThe introduction of digital tax audits also requires investments in suitable hardware and software as well as an adaptation of existing workflows, which makes a change to previous processes and structures necessary. Companies should therefore address the necessary changes at an early stage in order to be able to make optimal use of the advantages of the digital tax audit.\r\n\r\nMTR Legal Rechtsanwälte provides comprehensive advice on tax audits, estimated tax assessments, and other matters of tax law.\r\n\r\nFeel free to contact us!”
