Unpaid Taxes in Germany – How can Criminal Liability be avoided?

SUMMARY

1. Unpaid Taxes in Germany – First alternative: Just doing nothing, nobody will ever know…
2. Unpaid Taxes in Germany – Second alternative: Clear the air!

I. Unpaid Taxes in Germany – First alternative: Just doing nothing, nobody will ever know…

At the end of the year, taxes often play an important role. Sometimes taxpayers come to the conclusion that there are taxes they had to pay, but payment has never happened. This can lead to delicate situations as violations of the German tax laws are taken very seriously by authorities. Consequences range from severe fines and other penalties to imprisonment.

What are the basic alternatives taxpayer have when being exposed to this situation?

Of course, this is probably not a good idea. If there is a legal obligation to pay a tax, there is no way around it. Tax compliance is very strong in Germany. The odds are high that this will come to light sooner or later. The more years pass, the higher the interest that has to be paid on taxes owed to the German government.

Even if the underlying facts are complex, German tax authorities have a wide range of tools to get to the bottom of this. That applies to international tax structures, too. International tax information exchange works. For instance, the scope of Germany’s automatic international tax information exchange with the US and China is enormous. In practice, taxpayers often receive a letter from tax authorities about matters that had happened several years ago. In these usually quite short letters, authorities basically notify the addressee about their knowledge of “the facts” prompting the taxpayer to take a stand. Once it reaches this point, this means serious legal trouble. Criminal proceedings can hardly be prevented, the clock is ticking.

Last but not least, German tax authorities will not accept defenses as “I did not know that this had to be taxed” or “I have forgotten to declare this”. From a legal point of view, taxpayers have to be aware of their tax duties. If they do not know the law or tend to forget their duties, they have to hire tax consultants such as lawyers helping them to comply with German tax law.

II. Unpaid Taxes in Germany – Second alternative: Clear the air!

That does not mean to simply contact authorities telling them you are sorry about not having paid all taxes you had been obligated to. Authorities would very likely assess that as a confession and charge you with tax evasion. The way out is the so-called “voluntary self-disclosure” (-Strafbefreiende Selbstanzeige-, Sec. 371 AO/General German Tax Code)”. With a successful “strafbefreiende Selbstanzeige”, you cannot be held accountable for breaking German tax law. There are generally three requirements to meet for a successful voluntary self-disclosure:

1. The voluntary disclosure has to be filed in due time (+)

Bottom line: It has to be the taxpayer who gives this information to the authorities. In other words, the information has to be new to the tax officials. That is if there already has been an official suspicion against a taxpayer, Sec. 371 AO will be barred. For example, this is the case when investigation proceedings had been initiated before. This is why time is always of the essence when dealing with voluntary self-disclosures in this context.

The situation is not just done with clearing the air on the issue that has been the motivation to contact German tax authorities in the first place. Your tax compliance will be audited comprehensively for the period of the last ten years. If tax officials find other violations of German tax law, the taxpayer will be prosecuted for every issue – even the one you have voluntarily disclosed. German tax applies an all-or-nothing approach here. It is essential to professionally review the tax declarations of the last ten years in order to avoid to being victimized by an over-ambitious tax auditor. These are the sad cases when a taxpayer tries to make the right choice, but everything is in vain for something that maybe happened ten years ago.

2. The outstanding taxes, interest and surcharges are paid fully (+)

The German government needs money. Absolution can be bought if the taxes, interest and – depending on the specific case – surcharges are paid. The payment period can be rather short which is why sufficient funds have to be available immediately. If properly done, this voluntary self-disclosure has been proved effective in practice. It has literally been a “get out of jail card” in many cases in the past.  

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