Legal options for taxpayers
A tax audit or external audit is not only time-consuming for companies and self-employed individuals. If there are unclear or incomplete accounting records, the tax office may make estimates and require additional tax payments. It is important for taxpayers to know that not every estimate is permissible.
A tax audit is generally announced in advance. Companies and self-employed individuals should prepare thoroughly for the audit and carefully compile and check the required accounting documents for completeness. If an estimate is nevertheless made at the end, it can be reviewed whether the tax assessment is justified, according to the commercial law firm MTR Legal Rechtsanwälte, which, among other things, advises on tax law.
Duty to cooperate during a tax audit
Taxpayers are generally obliged to cooperate during a tax audit, i.e., they must grant the auditor access to documents and provide information. However, there is no obligation to incriminate oneself.
Even when faced with critical questions from the auditor, taxpayers should remain cooperative, calm, and objective. If anything is unclear, a written explanation can be requested. It is advisable to record all conversations and findings during the audit in order to produce them in the event of a dispute. It may also be wise to involve a tax advisor in the audit from the outset.
Tax estimate after audit
If the tax auditor concludes that the accounting or records are deficient, incomplete, or not plausible, he can estimate the tax bases according to § 162 of the German Fiscal Code (AO). This means the tax office determines the tax bases using its own calculations or empirical values—usually to the taxpayer’s disadvantage.
Typical reasons for a tax estimate include improper bookkeeping, missing or incomplete receipts, significant discrepancies between declared and estimated values, or cash transactions without sufficient documentation, as often seen in the hospitality industry or retail.
Legal options in the event of a tax estimate
If a tax estimate is made following a tax audit, the taxpayer has several legal options: First, he can comment on the audit report. Generally, he receives the audit report before the amended tax assessment is issued. The report should be thoroughly reviewed. It is possible to respond in writing to individual findings and raise objections. A well-founded counterstatement, possibly supported by subsequently submitted documents or expert opinions, can prompt the tax office to deviate from or mitigate its estimate.
In addition, an objection can be filed against the tax assessment notice. The objection period is one month from notification of the notice. During the objection procedure, the facts are re-examined. New documents can be submitted and arguments presented. The tax office must address all objections.
If the objection does not lead to the desired result, the next step is to go to the tax court. A lawsuit must be filed within one month after the objection is rejected. In court, an independent review of the estimate and the procedure followed by the tax office can be carried out.
Inappropriate tax estimates
If the tax estimate is inappropriate, methodologically flawed, or disproportionate, there are good prospects for challenging it. The Federal Fiscal Court already ruled on February 26, 2018, that the results of a tax estimate must be consistent, economically feasible, and reasonable (Ref. No. X B 53/17). The estimate must therefore be based on actual factual indicators to determine the tax bases. In proceedings, the tax office must prove that the estimate is comprehensible.
As a number of other decisions also show, a tax estimate must not be an arbitrary measure by the tax office, but is subject to strict legal requirements. For example, an estimate without a specific accounting deficiency is inadmissible. The tax office must also be able to justify its choice of estimation method and must grant the taxpayer the legal right to be heard.
Options for taxpayers
Taxpayers confronted with an estimate should check whether the prerequisites actually existed and whether the estimation method used is appropriate. They have legal recourse ranging from commenting on the audit report to filing an objection and, if necessary, a lawsuit. It is important to seek tax advice as early as possible. This is the only way to prevent an excessive estimate from becoming final and leading to a significant additional tax burden.
MTR Legal Rechtsanwälte advises on a tax audit and on other tax law matters.
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