In criminal law for tax offenses, general fiscal law is superimposed by the particularities of criminal proceedings.
The defendant in fiscal law proceedings is, on the one hand, confronted with the charge of having committed a crime. This leads to him, for example, fundamentally having the right to remain silent. On the other hand, he is obliged to continue to declare his taxes correctly and to pay them. The constellation of tension between the position as defendant in criminal proceedings and the position as a citizen obliged to pay taxes often leads to very special problems, which cannot be solved by knowledge of fiscal law or criminal law alone.
A further difficulty of criminal law for tax offenses is that there are only very few legal regulations. The central standards of General Fiscal Law, i.e. the code of procedure of fiscal law refer to the standards of the code of criminal procedure in a complicated interaction.
Even experienced defense lawyers often struggle with criminal law for tax offenses because an appropriate processing of founded knowledge is required. In contrast, tax advisers who have excellent training in fiscal law, frequently have difficulties dealing with the procedural and contentual particularities of criminal proceedings. Furthermore, the tax advisers who submitted an objectively wrong tax declaration for their clients, have good reasons not to continue to represent this client if it comes to the filing for criminal proceedings.
The defense lawyer specializing in tax law must be equally knowledgeable of criminal law and fiscal law. Apart from this special qualification, which, for example, can be recognized by the title of lawyer specializing in criminal law and fiscal law, the main requirement of a fiscal defense lawyer is his independence. A lawyer worrying about having to “save his own skin” will hardly bring up the courage and resolution to confront the investigative authorities, in order to represent the client’s interests.
The area of conflict between fiscal law and criminal law is a minefield and involves significant risks even for advisers. The fact that these risks are not only of a theoretical nature is shown, among others, by the fact that preliminary criminal proceedings are initiated against tax advisers (lawyers/tax advisers) again and again, in which they are charged with not having fulfilled the fiscal obligations they were contracted to fulfill on behalf of their clients. Whereas criminal proceedings are usually dealt with by the public prosecutor’s office and the police, one is confronted with several points of contact with completely different functions when it comes to criminal law for tax offenses.
It is not uncommon for criminal proceedings for tax offenses against businessmen to start during a tax audit. If indications of a tax offense emerge during a tax audit, section 10 of the German Tax Audit Rules (Betriebsprüfungsordnung, BpO) requires the competent unit to be notified without delay. This does not require the entire audit to be discontinued. If the taxpayer is under suspicion, enquiries addressed to that taxpayer concerning the suspected conduct may resume only after notification that criminal proceedings have been initiated. Insofar as the findings may also be used in the criminal proceedings, the taxpayer must be informed that cooperation in the tax assessment proceedings can no longer be compelled. The background behind this regulation, which is unfortunately not always observed in practice, is that the defendant is entitled to certain rights as of this point in time – above all, the right to remain silent. An auditor expressing the suspicion of a tax offense is thus usually not ill-disposed, but merely fulfilling his duty by law. The notification of fiscal criminal proceedings enables the person concerned to involve a qualified lawyer and to work out his own strategy.
The self-image of tax investigators and company auditors has changed significantly within the past few years. Due to the attention and support from the public, which the civil servants have been experiencing in the media, they have become more self-confident. At the same time, auditors and investigators are being better trained to recognize typical signs of tax evasion (not uncommonly in combination with corruption).
Consultant fees for example are being audited more carefully. It is not uncommon for there to be the suspicion that hidden bribery payments are involved, which are not tax-deductible under section 4(5), first sentence, no. 10 of the German Income Tax Act.
A trained tax auditor will also pay particular attention to items within the scope of leasing and renting that reveal a loss in the tax declaration due to high amortization. As long as these items are used privately or by closely related persons in reality, the suspicion arises that a rental agreement has been concluded with third parties in pretence only.
In the case of tradesmen, frequent triggers for penal proceedings for tax fraud are cash payments (pizza baker, doner kebab restaurants or Chinese takeaways) or private cash flows from abroad which cannot be completely proven.
Another potential trigger for a tax investigation is an incorrect claim to joint assessment by spouses who are permanently separated (section 26 of the German Income Tax Act). It is not uncommon for such to state living in a mutual apartment although in reality, the wedded cohabitation no longer exists. In these cases, this can represent tax evasion if the tax office is not informed about the married couple permanently living apart in reality.
If penal proceedings for tax crimes are not initiated in the scope of a company audit, this frequently happens by the tax investigation. The responsibilities of the tax investigation are regulated in § 208 German Fiscal Code and are as follows:
The investigation of tax offenses and tax misdemeanours,
The determination of tax bases in the cases named in number 1,
The discovery and investigation of unknown tax cases.
In practice, two typical constellations can be described as to why tax investigations initiate penal proceedings:
On the one hand, there are tips from the outside every now and again. The “classic one” is the not so uncommon anonymous tip such as from an ex-wife or ex-lover during an argument when separating. As soon as the tax investigators have received such a tip, they will follow up the suspicion with all available means. In doing so, the means of investigation range from internal comparisons over account checks at banks, questioning neighbors, employers and social insurance agencies to searching the suspect’s house.
If there are sufficient indications of tax evasion, the tax authority’s fines and criminal matters unit becomes involved (abbreviated to BuStrA in Bavaria and also known as StraBu in some other federal states).
Yet, it happens time and again that tax investigators systematically comb through certain professional or social groups. In the recent past, in this context, there have been for example penal proceedings for tax crimes initiated against foreign IT specialists.
Such sector-wide tax investigations can also concern scrap dealers, sex workers and taxi drivers.
Tax investigations are also to be expected in relation to an increased emergence of corruption or fraud investigations into doctors, chemists and manufacturers of pharmaceuticals.
In the case of such comprehensive investigations, tax defense lawyers face the challenge of recognizing whether it is a one-off case or whether a “new wave” of penal proceedings for tax crimes is in the offing. If this is the case, it is usually not sufficient for the defense to restrict it to a one-off case. The investigators are increasingly networked with each other and exchange knowledge across Germany – sometimes even internationally. Then, systematic and multidisciplinary background knowledge is also to be expected of defense lawyers specializing in tax offenses.
What is special about criminal tax proceedings?
Under § 385 AO, the general rules of criminal procedure apply to criminal tax proceedings unless the Fiscal Code (Abgabenordnung, AO) provides otherwise. An accused person therefore has the same rights as in any other criminal case, in particular the right to remain silent, the right of the defense to inspect the file and the right to defense counsel. A number of special rules are added.
The first concerns the investigating authority. Under § 386 AO, the tax authority may in certain cases conduct the investigation independently, without the involvement of the public prosecutor’s office, and then exercises the powers that would otherwise belong to the prosecutor. As a rule, this requires the act to constitute solely a tax offense. A statutory exception covers infringements of other criminal laws concerning church taxes or other public levies linked to tax bases, tax assessment amounts or tax amounts. The authority may no longer conduct the proceedings independently once an arrest warrant or a committal order has been issued in respect of the act. The public prosecutor’s office may also take over the proceedings at any time.
The second concerns the start of the proceedings. Under § 397 AO, criminal proceedings are initiated as soon as an investigating authority or a criminal judge takes a measure recognisably aimed at prosecuting a person for a tax offense. No letter is required. The initiation must be recorded in the file and communicated to the person concerned at the latest when he or she is asked to state facts or produce documents connected with the suspected offense. A person who has not yet received any correspondence may therefore already be an accused.
The third concerns the defense. Under § 392 AO, tax advisers (Steuerberater and Steuerbevollmächtigte), auditors (Wirtschaftsprüfer) and sworn accountants (vereidigte Buchprüfer) may act as defense counsel on their own only for as long as the tax authority conducts the proceedings independently. Thereafter they may generally act only together with a lawyer or a law teacher at a German higher education institution within the meaning of the Higher Education Framework Act who is qualified to hold judicial office. Court approval remains possible subject to the requirements of § 138 (2) StPO. Finally, criminal tax law provides a special route to immunity from punishment through a voluntary disclosure (Selbstanzeige) under § 371 AO. Notification of the initiation of criminal proceedings is expressly listed there as a bar to immunity.
Dr. Tobias Rudolph discusses correction duties, voluntary disclosure and defense in historical cum-cum cases in his article on cum-cum and German criminal tax law.
The article on evasion of inheritance and gift tax examines the particular notification and return-filing duties, limitation periods and voluntary self-disclosure.
How do criminal proceedings and tax proceedings relate to each other?
Under § 393 AO, the two sets of proceedings run in parallel and each follows its own rules. The tax assessment procedure does not end because criminal proceedings have been initiated, and the duty to file tax returns continues. Even an estimate of the tax base by the tax office does not, under § 149 (1) AO, remove that duty. Conversely, no one may be compelled by coercive measures to make statements that would incriminate him or her of a tax offense. This does not, however, create a right to submit new incorrect returns.
If the tax office resorts to an estimate under § 162 AO for lack of cooperation, that estimate does not bind the criminal court and must not be adopted without examination. The criminal court must establish the amount of tax evaded itself under the standards of proof applicable in criminal proceedings. Unresolved doubts are resolved in favor of the accused.
Where the assessment of an act as tax evasion depends on whether a tax claim exists, tax has been understated or unjustified tax advantages have been obtained, the criminal court may under § 396 AO suspend the criminal proceedings until the tax proceedings have been concluded with binding effect. The limitation period is suspended for the duration. An objection (Einspruch) against a tax assessment does not, under § 361 AO, automatically suspend its enforcement. Defense in the criminal proceedings, the objection and an application for suspension of enforcement are therefore three separate steps that need to be coordinated.