In my practice, I have recently seen more cases in which tax returns have remained outstanding for several years. Eventually, the backlog is tackled: the first return is filed, with the next to follow once all the documents are available.
What sounds like a sensible solution can have serious criminal law consequences. A late tax return may concern an offence of tax evasion. Anyone seeking immunity from punishment by filing overdue returns must therefore meet the requirements for a voluntary disclosure.
When does late filing become tax evasion?
Missing a filing deadline does not automatically constitute tax evasion. Further requirements must be met, including intent and an understatement of tax or a failure to assess it on time. However, it can be sufficient that tax is not assessed in time because the return was not filed. An intention to declare and pay the tax later does not therefore automatically rule out criminal liability. Attempted tax evasion is also punishable. Section 370 of the German Fiscal Code (AO)
Anyone with several outstanding returns should therefore have the potential criminal tax implications assessed before submitting the first one.
A voluntary disclosure must be complete
A late tax return can constitute a voluntary disclosure. Its substance matters, not its label.
Section 371 AO requires full disclosure of all tax offences relating to the same type of tax that are not time-barred, and at least all offences relating to that tax within the last ten calendar years. This grouping of offences is known as the Berichtigungsverbund (the offences that must be disclosed together) . A fully completed return for a single year is therefore insufficient if other relevant years or facts are omitted. Further reading on the Berichtigungsverbund (in German)
Completeness alone is not enough. No statutory ground barring immunity may apply, and the required payments must be made on time. Special rules apply to certain tax filings, particularly advance VAT returns and payroll withholding tax returns. Section 371 AO
Why filing returns “year by year” is risky
Consider an example: income tax returns are outstanding for three consecutive years. Assume that tax evasion has already occurred in each year. Only the oldest return is filed initially. The other two are to follow later.
This does not yet cover everything that must be disclosed. The first return alone does not secure immunity from punishment. At the same time, the tax office receives information that may prompt criminal investigations.
If notice that criminal proceedings have been initiated is given before the missing information has been fully disclosed, a voluntary disclosure may no longer secure immunity. Prior discovery of an offence can also prevent immunity if the statutory conditions are met. Relying on being able to supply missing information later therefore entails a substantial risk. Section 371(2) AO
The bar to immunity can extend to other years
The potential scope of this bar is particularly problematic. It need not be limited to the year expressly identified in the notice of criminal proceedings.
Under a broad interpretation also adopted by tax authorities, the bar can extend to the entire Berichtigungsverbund for the same type of tax. Other assessment years, including later years within that group, can therefore be affected. The scope is legally disputed. For advisory purposes, this means that it is unsafe to assume that the bar applies only to the year expressly identified. Further reading on the scope of the bar (in German)
In the example, immunity may therefore also be lost for the other two years. If the tax evaded amounts to EUR 20,000 in each year, the total at stake is EUR 60,000. The bar does not increase the tax itself. It can, however, mean that immunity is no longer available in relation to a much larger total amount.
Review the full circumstances before filing the first return
The solution is not to keep waiting. The backlog needs to be addressed promptly and in a coordinated way: which types of tax and which years are affected? What information is missing? Do any grounds barring immunity already apply? Can the required payments be made?
Missing records do not justify merely announcing that details will follow later. In certain circumstances, a voluntary disclosure can be based on properly estimated tax assessment figures. Even then, all relevant circumstances must be covered from the outset, and the information must enable the tax to be assessed correctly. This requires careful preparation. German Federal Court of Justice (BGH), decision of 20 May 2010, 1 StR 577/09 (in German)
These criminal law implications are not always given sufficient attention in tax advice either. Bringing the bookkeeping and tax returns up to date must therefore be coordinated with an assessment of the voluntary disclosure requirements at an early stage.
Anyone several years behind should seek advice on criminal tax law before filing an individual overdue return. Better still, avoid letting a backlog arise in the first place. If one already exists, the priority is to proceed completely and in a coordinated way from the outset.