It is a common occurrence following a company audit for the tax office to issue an estimate of additional income. But businesses on the receiving end of one of these estimates do not necessarily have to accept the outcome if it is clearly too high.
Accounting records that are found in the course of a company audit to be ambiguous or incomplete often lead to the tax authorities producing estimates of additional income and demanding that the businesses under investigation make back payments. However, these estimates are oftentimes excessive and – at least in terms of the amount – sometimes invalid, notes commercial law firm MTR Legal Rechtsanwälte.
The tax authorities are not entitled to issue estimates of additional income as they see fit. Germany’s highest tax court – the Bundesfinanzhof (BFH) – ruled back in February of 2018 that the outcome of a tax estimate must be conclusive, economically feasible, and reasonable (case ref.: X B 53/17). This means that the estimate needs to be based on real evidence if it is to form the basis of taxation. Assuming this is the case, the fiscal authorities can impose an excess charge if there are accounting irregularities. The tax office is required to demonstrate in proceedings that the tax estimate is reasonable.
Despite the clear case-law that the BFH has delivered to date, it is not uncommon for tax inspectors to overshoot the mark and for excess charges to be unlawful. Such were the circumstances, for example, in a case heard by Münster’s fiscal court, the Finanzgericht Münster (case ref.: 10 K 261/17 K, U).
The relevant tax office had identified accounting deficiencies in an open cash register during a company audit, which revealed hidden cash deposits of unclear origin. After the sole shareholder explained that these were deposits from his private assets, the auditors subsequently analyzed the shareholder’s private accounts only to discover missing amounts, which were then treated as additional company revenue as well as hidden profit distributions to the shareholder in the context of the auditors’ estimate.
But the Finanzgericht Münster did not agree with this assessment. Just because it was not possible to clarify the origin of funds held by the shareholder did not justify the assumption that these amounted to hidden profit distributions to him or her. The court held that the lack of clarity surrounding the origin of the funds did not warrant an additional estimate of income for the company.
The ruling demonstrates that an additional estimate is not justified in every instance.
MTR Legal Rechtsanwälte is here to support clients facing company audits and tax disputes over additional estimates of income.
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