Ruling of the Nuremberg Tax Court on January 24, 2024 – Case No.: 3 K 1158/22
Undeclared work can have serious consequences both criminally and in terms of tax law. As evidenced by a ruling from the Nuremberg Tax Court dated January 24, 2024 (Case No.: 3 K 1158/22), in addition to severe financial penalties or imprisonment, undeclared work can also authorize the tax authorities to make tax estimates.
Undeclared work occurs when an employer does not properly pay taxes and/or social security contributions for their employees. Not only does this make the employer liable for criminal charges, but it also exposes them to the risk of back taxes, according to MTR Legal Rechtsanwälte, a law firm specializing in tax criminal law.
Investigations Due to Suspected Undeclared Work
In the case at the Nuremberg Tax Court (FG), the matter involved a business owner who ran a crafts enterprise with four employees. Prompted by the German Pension Insurance, the responsible Main Customs Office and the tax office conducted further investigations following a business audit. They concluded that the entrepreneur had employed workers off the books, paying them in cash under fictitious involvement of service companies without maintaining proper payroll records.
The investigators noticed that although the business’s revenue had increased, the proportion of wages to total revenue was unrealistically low. At the same time, expenditures for external services were very high. It turned out that the supposed invoices from shell companies were for services that were never actually rendered. During the investigation, it became increasingly clear that these were cover-up invoices to disguise cash wages off the books, with the money eventually returning to the employer.
Increasing Revenue, Low Wage Sum
The suspicion of black money payments was reinforced by the low wage sums between 2015 and 2019, where employees earned only between 359 and 606 euros monthly. They were employed as minor earners and supposedly paid accordingly. Since they did not receive any social benefits, the Customs Office concluded that their income was insufficient to cover their living conditions, suggesting that they worked full-time and received a significant portion of their wages as black money. Further investigations strengthened the suspicion of undeclared work.
The investigators were thus convinced that undeclared work was present and that wage tax had been evaded. Due to the lack of records of the actual wage sum, the tax office estimated it based on various parameters and set the wage tax accordingly. With a liability notice, the tax office held the employer accountable for the wage tax and wage tax deductions.
FG Nuremberg Dismisses Complaint
The employer contested the notice, arguing that the findings were based only on assumptions and suspicions. However, his complaint was unsuccessful at the FG Nuremberg.
The court stated that the employer is liable according to § 42d Abs. 1 Nr. 1 EStG for the proper payment of wage tax. If it is impossible to determine the amount of wages and calculate the wage tax because the employer did not keep the required records, then the wages and the corresponding wage tax must be estimated according to § 162 AO. This was the case here.
In the labor-intensive construction industry, the court could generally estimate two-thirds of the net revenue as the net wage sum for illegal employment relationships in the form of undeclared work, according to the FG Nuremberg. A tax rate of 14 percent could be applied to the wage sum. This was within the tax office’s estimation range and was not increased, the court further explained.
Criminal Consequences
In addition to tax law consequences, the undeclared work also had criminal repercussions for the employer. In the criminal proceedings, he was sentenced by the competent district court to a suspended prison sentence of 1 year and 4 months for tax evasion. Additionally, he was fined 90 daily rates at 50 euros each.
The ruling highlights that serious sanctions can be expected for undeclared work and tax evasion. Therefore, it is crucial to consult a knowledgeable attorney who can develop an effective defense strategy when facing such allegations.
MTR Legal Rechtsanwälte specializes in tax law and tax criminal law.
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