Tax evasion & voluntary disclosure – what you should know!

Many people associate the topic of tax evasion with celebrities who “end up” in prison for a certain period of time with a lot of hype in the tabloids. We remember, for example, soccer managers, ex-professional tennis players or star chefs who were tried for tax evasion, sentenced to prison and had to spend some time in jail.

However, tax evasion is by no means a crime that only affects the “rich and famous”. Ordinary citizens and entrepreneurs can also find themselves accused of tax evasion – and sooner than they think! – be accused of tax evasion. This can happen if tax returns are not submitted on time, if there is a suspicion of bogus self-employment or if you have received child benefit without authorization. There are many ways to commit tax evasion – for everyone.

In this article, we have compiled the most important information on the subject of tax evasion so that you know when the ice becomes thin, i.e. when you could be threatened with criminal tax proceedings, and how you should behave in such a situation.

Tax evasion: what is it? 

Tax evasion is a criminal offense. According to Section 370 of the German Fiscal Code (AO), anyone who …

• provides incorrect or incomplete information to the tax authorities or other authorities (e.g. customs) about tax-relevant facts,
• fails to inform the tax authorities of tax-relevant facts in breach of duty or
• fails to use tax stamps or tax stamps in breach of duty

and thereby reduces taxes or obtains unjustified tax advantages for himself or another person – according to the law.

And the wording of the law also shows that it is not only by actively deceiving the tax authorities that you can make yourself liable to prosecution. Deliberately not informing the tax authorities about tax-relevant facts can also constitute tax evasion.

Tip: The offense refers to all conceivable taxes: income tax, gift tax, inheritance tax or VAT. Anyone who “evades” customs can also commit tax evasion.

And last but not least, you should know: Even if, for example, the tax office discovers false/missing information and does not issue a (false) tax assessment notice, this is already punishable – attempted tax evasion is also punishable.

Intentional and “negligent tax evasion”?

In principle, a person must act with intent in order to be liable to prosecution for tax evasion.

However, “unintentional” false/incomplete information may be provided, especially in all types of tax returns. This is not enough to constitute “genuine” tax evasion. Anyone who negligently makes false or incomplete statements to the tax office is committing “reckless tax evasion (Section 378 AO)”, which is also referred to as “negligent tax evasion”.

However, the difference between the two offenses is enormous. This is because reckless tax evasion is an administrative offense, not a criminal offense! This has advantages: A custodial sentence is not possible for an administrative offense; “only” fines are threatened. However, this also has a disadvantage: a voluntary disclosure – more on this below – as in the case of tax evasion is not possible for a tax offense. 

Tip: If you have negligently failed to submit all the information to the tax office, you must correct your details immediately (so-called correction obligation, Section 153 AO) if you realize your mistake. If you do not make a correction in such a case, this can become a separate act of tax evasion because you have previously acted unintentionally and are now deliberately failing to make the correction.

What are the penalties for tax evasion?

The penalties for tax evasion cannot be generalized – it depends on the specific case.

The statutory penalties are as follows:

• A “simple” tax evasion can be punished with a fine or a prison sentence of up to 5 years.
• In serious cases of tax evasion – e.g. where large sums have been evaded, etc. – there is a risk of up to 10 years in prison.

The decisive criterion for the respective penalty is the amount of tax that was or should have been evaded. The guidelines of the Federal Court of Justice form the basis for the amount of a penalty. As a general rule, custodial sentences are only imposed for tax evaded in excess of 100,000 euros, but then usually on probation. If more than 1 million euros in taxes have been evaded, a prison sentence without probation can hardly be avoided. And yet it always depends on the individual case.

Tip: In minor criminal tax proceedings, it is also possible for the proceedings to be discontinued against payment of a fine. Such an end to proceedings leaves no trace in the Federal Central Criminal Register. Depending on your personal situation, this can make a huge difference to your future career (e.g. managing director).

Statute of limitations: Tax evasion is also time-barred

Like almost all criminal offenses, tax evasion is also subject to a statute of limitations. This means that if the offense is time-barred, prosecution and conviction are no longer possible.

The length of the limitation period for tax evasion varies: it depends on whether it is a “simple tax evasion” or a serious case. According to Section 78 Para. 3 No. 4 StGB, simple tax evasion is time-barred after 5 years. However, particularly serious cases of tax evasion (Section 370 para. 3 sentence 2 no. 1 to 5 AO) are now only time-barred after 15 years. The basis for this is section 376 para. 1 AO.

Tip: The limitation period begins with tax evasion by submitting an incorrect or incomplete tax return. If several tax returns were incorrect, these are each separate offenses with different statutes of limitation!

In this respect, the possibility of prosecution for tax evasion may depend on whether a simple offense or a particularly serious case has been committed.

Why?

If an authority assesses a case as a particularly serious case 6 years after the tax return has been submitted, prosecution is possible from the authority’s point of view and the offense is not time-barred. However, if it is not a serious case, the offense would be time-barred after 5 years. Prosecution would no longer be possible.

Good arguments against the existence of a “serious case” can render an entire procedure invalid in such a case – good advice is essential here.

Self-disclosure for tax evasion – does it make sense or not?

Criminal tax law has a special feature when it comes to tax evasion: those affected can avoid prosecution by making a voluntary disclosure with exemption from prosecution in accordance with Section 371 AO.

Especially when the risk of being “exposed” for tax evasion increases, many people think about filing a voluntary disclosure. That is good and right. Nevertheless, you should not lose your head, but take action with caution and professional support.

Tip: A voluntary disclosure should never be made hastily and on your own initiative without (tax) legal advice. If you make mistakes here, you risk losing the effect of exemption from prosecution!

This is because voluntary disclosure with exemption from punishment is more complicated than you might think, as a number of factors must be taken into account at the same time in order for the voluntary disclosure to be exempt from punishment. For example, certain formal and content-related requirements must be observed and, last but not least, the timing of the voluntary disclosure can also determine whether or not the voluntary disclosure has an exempting effect.

In essence, it is important to provide the tax office with all tax-relevant facts retrospectively in the voluntary disclosure in such a way that the authority can easily and correctly determine the tax without extensive investigations.

Tip: A voluntary disclosure can be very complex, especially in a business context. For this reason, a voluntary disclosure should always be professionally accompanied and prepared.

When is it too late for a voluntary disclosure?

However, there are also situations in which a voluntary disclosure with exemption from punishment no longer works.

This is the case when …

• the tax evasion has already been discovered,
• criminal tax proceedings have been initiated or
• a formal order for the tax audit has already been issued.

Tip: If a tax audit is still pending but the formal order is still missing, a voluntary disclosure is still possible. In this case, haste is required without losing sight of the thoroughness of the voluntary disclosure.

What do you pay to the tax office?

If you are convicted of tax evasion or have made a voluntary disclosure in time to avoid prosecution, you must pay the evaded taxes in arrears. However, this does not stop there: interest of 6% is of course added to the amount.

If the amount of tax evaded was higher than 25,000 euros (per offense!), there is also a penalty: from 25,000 euros the surcharge is 10%, from 100,000 euros 15% and from 1 million euros 20%.

Our advice

Tax evasion is often much more than a trivial offense – false or incomplete statements to the tax office can result in substantial fines, penalties or even imprisonment.

For this reason, it is important and sensible – privately or as a company – to seek professional tax advice and tax law advice with two objectives: to be able to submit correct tax returns and, in the event of tax evasion or tax avoidance, to minimize the consequences with professional support.