Compliance/tax law: differentiating a corrected tax return from a voluntary disclosure

28 Jun 2019

Compliance/tax law: differentiating a corrected tax return from a voluntary disclosure

Titel: Gregor Wenzel

The internal control system for the fulfillment of tax obligations is a suitable instrument for avoiding criminal sanctions and fines.

By Gregor Wenzel

Meeting tax obligations is a major task. It begins with the collection of thousands of pieces of data as part of accounting. Errors come with the territory here. This susceptibility to errors is exacerbated by the complexity of tax rules. So it is no wonder that errors are discovered after the fact, mostly by the company itself, sometimes by the auditor, sometimes via the tax audit. There is consequently a need for correction, which the legislator has addressed with the option of correcting the incorrect information without penalty in accordance with section 153 of the Fiscal Code of Germany (Abgabenordnung - AO). So far so good.

However, since the partial self-disclosure has been abolished, there is a risk that mistakes may be considered reckless or even intentional, which would constitute an administrative offence or even a criminal offence. This then blocks the route of correction under section 153 AO. The boundaries between recklessness and (conditional) intent are fluid, and are interpreted by the criminal prosecution authorities rather restrictively in tax matters (in case of doubt against the accused). Even the partial reintroduction of the partial self-disclosure for advance submissions of tax returns has not changed this, particularly as it does not cover the associated annual returns.

Those wishing to meet their correction obligation will in many cases submit a correction statement, which fulfils all the criteria of a voluntary disclosure in accordance with section 371 AO, for reasons of concern about the uncertain evaluation of the error under criminal law. Although this is understandable, it (initially) provides comprehensive protection outside of the blocking reasons. However, the effectiveness of the voluntary disclosure presupposes a complete review of the past 10 years, at least for the type of tax concerned. Moreover, the correcting party has just one opportunity as the voluntary disclosure is subject to a completeness requirement. If an additional error is found later, which is not unusual in the major task of meeting tax obligations, the self-disclosure is no longer effective – apart from the lower impact cases.

The option of correction via section 153 AO should therefore not be rejected prematurely, even if the prosecuting authorities hastily assess a supplementary tax return under section 153 AO, intended to correct simple entry or calculation errors, i.e. negligent non-statement or misstatement, as a voluntary disclosure. The tax authorities indicate in the implementation rules for section 153 AO a possibility of reducing the uncertainty regarding the criminal assessment of the error being corrected. If the taxpayer has set up an internal control system which serves to meet tax obligations, this may be an indication that there is no evidence of intent or recklessness, but it does not exempt the taxpayer from examining the individual case in question (Federal Ministry of Finance, AEAO for section 153 AO dated 23 May 2016, no. 2.6). Given the careful wording of the implementation rules due to the principle of legality, it is worth investigating this reference.

Internal control system

Designing a tax compliance management system (TCMS) properly can protect the responsible parties at the company from criminal prosecution. This requires creating structures within the company that guarantee full implementation of tax return obligations. Careful selection and education of employees regarding their rights and duties, an appropriate distribution of tasks and organisation of work processes, appropriate controls to ensure compliance with obligations and, where necessary, the imposition of sanctions, are arguments against intent or recklessness on the part of those responsible and thus exclude sanctions against the company itself.

Depending on the size, type, industry and scope of a company, a TCMS must be set up. The objectives are to be defined by the company in tax guidelines or an organisational manual. The Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer - IDW) defined compliance management systems (CMS) as follows in the draft of its practical note (Praxishinweis) 1/2016: CMSs “are the principles and measures of a company, introduced on the basis of the objectives defined by the legal representatives, which are aimed at ensuring that the legal representatives and the employees of the company and, if applicable, third parties, behave compliantly, i.e. comply with certain rules and thus prevent material infringements (breaches of rules)”. All measures taken by the company must therefore reflect the will to act in accordance with the law. The management must clearly commit to the implementation of and adherence to TCMS structures. Employees must be trained and all measures must be comprehensively and promptly documented in order to be traceable for possible investigations by the criminal prosecution authorities at a later date. The less those responsible educate themselves about their tax obligations and the surrounding circumstances, the less measures or structures are created to comply with tax obligations and implementation is not monitored or only to an insufficient extent, the easier it will be for the criminal prosecution authorities to assume a conditional intent in accordance with section 370 AO. The interfaces, responsible persons and roles in the company must be defined, as well as the procedure for ensuring compliance with the company's tax obligations.

Another form of TCMS is the exhaustion of legal opportunities to receive information from tax authorities to clarify tax-relevant circumstances in advance. This includes, for example, the advance rulings pursuant to section 89 (2) AO which can provide a company with legal certainty before circumstances are realised. The same applies to the binding commitment pursuant to section 204 AO, which, following the conclusion of an external audit, provides security with regard to the future tax treatment of realised and audited circumstances as well as those presented in the audit report.


An internal control system set up and put into practice for the fulfilment of tax obligations can significantly reduce the risks of tax penalties and fines for companies and their executive bodies as well as for senior employees in tax departments. However, this requires regular documentation in order to provide evidence of the establishment, monitoring and further development of the system. A TCMS is not an exemption from the examination of each individual case, but it does serve to provide somewhat more reliability in the grey area between correction in accordance with section 153 AO and voluntary disclosure.

Gregor Wenzel, Attorney-at-law, Tax Consultant, Partner, BTU Simon Rechtsanwalts- und Steuerberatungsgesellschaft mbH, Munich