Criminal Tax Proceedings: Course of Events and Defence

Criminal tax proceedings are triggered by an initial suspicion of tax fraud. The prosecution authority, usually the tax investigator, learns about a possible tax offence by receiving internal or external information, or by its own investigations.  

After an initial suspicion has been raised, the Office for Fines and Criminal Tax Matters (Bußgeld- und Strafsachenstelle, BuStra) commences investigations. The date and time of investigations being commenced will be recorded in the case files. This is important for the calculation of limitation periods and their respective suspension. The accused will not always be notified of investigations being commenced, the decision is made on a case-by-case basis. The authorities frequently omit notifying the accused, in order to prepare a search of premises and utilise the element of surprise.  

As soon as tactical considerations permit and nothing else stands in the way, the accused will be notified by the Tax Authority that criminal tax proceedings have been commenced. The allegations must be specified in detail, such as the tax period and the types of taxes which are the subject of the proceedings. As set out in the Code of Criminal Procedure, the accused must be informed, that he is not obligated to give testimony and may instruct an attorney of his choice to represent his interests.  

Accused taxpayers should make use of both options by rejecting any offer made by the tax investigator or other authorities to discuss the matter and refuse to provide any factual information. Additionally, he should immediately contact an experienced tax attorney or defence lawyer to coordinate the next steps. In practice, taking a stand against the allegations as early as possible and promptly establishing communications with the tax investigator or the Office for Fines and Criminal Matters (Bußgeld- und Strafsachenstelle) frequently facilitates the process and a quick conclusion of investigations.

Once a tax attorney has been instructed by the accused, a defence strategy can be developed, usually in cooperation with the current tax adviser. The facts of the case and the legal situation must be discussed and assessed thoroughly at the outset. Possible defence strategies for the case at hand can be developed subsequently.

Typical weak points seized upon by the defence in criminal tax proceedings are:

A. Incorrect or incomplete information
It must be verified, whether the accused has in fact given incorrect information in respect of tax-relevant facts or has rather employed an interpretation of the law, which departs from the usual interpretation by the administration.

B. Exonerating regulations
Any laws and regulations which might be cited to exonerate the accused must be investigated. This includes the statutory provisions contained in material law, criminal procedural law, criminal law, EU-law and possibly double tax treaties.

C. Long-term tax fraud or short-term “liquidity tool”
It must be established, whether the tax fraud was systematic as to intended long-term effects or if it was merely aimed at reporting certain taxes in different tax periods, thereby deferring payment (in the latter case, only the interest was lost by the Tax Authority).

D. Accomplished or attempted tax fraud
It must be established, whether the offence was actually accomplished or only attempted in legal terms, or if the offence was “merely” being prepared.

E. Avoiding classification as “particularly serious” tax fraud
It must be established, whether a particularly serious tax fraud is alleged and if this classification can be contested.

F. Defence in respect of the subjective elements of the offence
The subjective elements of the alleged offence must be questioned. This means the question, whether

• the offender acted with wilful intent in committing the objective offence, as set out in § 370 AO and thereby committed a criminal offence, or
•  if he “merely” acted frivolously in the meaning of § 378 AO and thereby “merely” committed a misdemeanour, or
• if he “merely” acted negligently or even guiltlessly and has therefore neither committed an office nor a misdemeanour.

G. Erring in criminal tax law
The difficult question of whether the accused held a relevant misapprehension at the time of committing the offence must be answered. Criminal tax law considers factual errors, inevitable errors regarding prohibition and avoidable errors regarding prohibition (mitigation of penalty). It must then be assessed, whether the error is a provable fact or only a self-serving protective assertion. Clients are often misguided in believing that such an erring will protect them from criminal sanctions. If in doubt about any question related to tax affairs, clients should obtain professional advice. Conditional intent is usually assumed otherwise.  

H. Limitation issues
It must be assessed, which tax offences are already time-barred for criminal prosecution.

I. Quantification of liability 
The amount of taxes allegedly withheld must be reconfirmed. There are a number of possible calculation methods and options entailing certain legal effects in criminal tax law. Are arbitrary tax assessments contestable and do they comply with the principles applicable to evidence in the respective proceedings? The burden of proof applies in tax law and the accused may have a special duty to cooperate. The principle of in dubio pro reo also applies in criminal tax law, which means that the accused enjoys the benefit of the doubt. The amount of taxes determined in arbitrary assessments will usually be significantly lower than the taxes relevant in taxation proceedings. Irrespectively, an arbitrary assessment is only admissible in its amount, but its substantiation is not admissible in a criminal court. The employed method, the figures used and the flawless calculation of an arbitrary assessment must be scrutinised, which presupposes a high level of competence in tax law.

J. Sentencing criteria
All exonerating sentencing criteria applicable to tax fraud must be assessed.

Developing a defence strategy:

A defence strategy must be developed and it must be determined, whether a so-called amicable defence strategy or an aggressive defence strategy will be employed (consensus or conflict): Employing an aggressive strategy means, that all procedural options are used to their full, legally permitted extent (applications to adjourn, reject, or terminate as well as complaints, applications in respect of evidence). This type of defence strategy will only be helpful, if the defence of the case is hopeless anyway and the accused stands nothing to lose. Such a strategy should further be employed, if the matter is expected to be time-barred or if the defence believes that the court will not offer a fair trial. Contrary to other types of criminal proceedings, an amicable defence strategy (consensus) will be employed in the majority of criminal tax proceedings. A good defence attorney should be able to appear both conciliatory as well as aggressively, in order to convince the investigative authorities, that mutual cooperation is being offered voluntarily for the purpose of settling the case and it is not to be construed as a sign of the attorney’s weakness.

The defence strategy must also consider ancillary effects of the offence, such as liability, professional bans, cancellation of a weapons license, disciplinary sanctions for public servants and professionals, visa restrictions and being banned from public tenders.

The defence attorney will in any case establish communications with the investigating tax authorities and serve a written power of attorney on them in respect of legal representation for the accused. This means, that further correspondence will be addressed to the defence attorney and direct, unrestricted contact with the accused is prevented. This protects the accused from making rash decisions or provide information which might be detrimental to his case.  

The next step is to apply for an inspection of the case files. It is a basic right of the accused, to have his lawyer inspect the case files. Access to the case files must be granted no later than at the point of investigations being concluded. The information obtained by inspecting the case files may provide important insights, particularly in respect of the information and concrete evidence available to the Tax Authority and forms the basis of the allegations. In the end, the inspection of the case files and the coordination with the accused will decide if and how to respond to the tax inspector or the BuStra.

In most cases, being completely uncooperative will not be helpful. It is more likely to achieve an early termination of the proceedings, if the investigative authorities are approached pro-actively and the focus is on a quick settlement. In an ideal case, it can be demonstrated to the Tax Authority that tax fraud has not been committed. Conclusive documentation must be tabled and witnesses named, both of which prove beyond any doubt, that the initial suspicion is unfounded. The proceedings will then be terminated due to a lack of adequate grounds for the initial suspicion.  

If it is not possible to completely exonerate the accused and the suspicion is substantiated, the offence is however insignificant, the option of terminating the proceedings under § 153 StPO and § 398 AO might be available. The termination of proceedings due to insignificance is at the discretion of the public prosecutor, as is the indictment under § 170 Sec 1 StPO. An indictment and the resulting trial are only the last resort and are not always desirable for the prosecution authorities, due to the efforts involved. Different approaches to a defence are therefore possible, which all aim at concluding the proceedings without a penalty, even if tax fraud has in fact been committed.  

§ 153a StPO provides for the suspension of criminal tax proceedings against payment of a fine, unless the severity of the case opposes such action. The amount of the fine must be reasonable in light of the facts and negotiated correspondingly. The defence strategy may question the ignorance of the Tax Authority in respect of tax-relevant facts. If the proceedings are terminated this way, the presumption of innocence of the affected taxpayer is fully retained for the purpose of tax assessment proceedings, which is beneficial. If all parties to the proceedings agree to terminate the proceedings on such grounds, the criminal tax proceedings will end at that point.

If such a termination of the proceedings is not possible and a fine or imprisonment of no longer than one year is expected, it should be aimed at terminating the proceedings by way of a penalty order under § 407 StPO. A penalty order offers the benefit of the accused not having to appear before a court in person, he will instead be served a penalty order by mail, which has the same legal effect as a judgement. This will keep the proceedings hidden from the press. The accused’s criminal record will also remain untarnished if a fine of up to 90 daily rates is imposed. This option of ending criminal tax proceedings enjoys a high level of acceptance in practice and is much preferable to a public indictment.

If no penalty order is applied for by the Office of Fines and Criminal Matters or the public prosecutor’s office, and the termination of proceedings is not an option, a bill of indictment is served and a trial before the court is applied for. The criminal judge at the County Court is responsible for cases, where the penalty is not expected to exceed two years imprisonment. If the expected penalty is up to 4 years imprisonment, a court of lay assessors at the County Court is responsible (one professional judge and two lay judges). In all other cases, the so-called Main Criminal Court at the Higher State Court (usually with two professional and two lay judges) is responsible. The main hearing is open to the public and the accused is granted the opportunity to give comprehensive testimony during the taking of evidence. This however also means, that the accused must appear before the court in person and may be arraigned if necessary. If the accused succeeds in convincing the court that he is not guilty, the proceedings will end with an acquittal. If however the Tax Authority succeeds in proving the offence of tax fraud, the accused will be sentenced. The law provides for fines and imprisonment. A judgement by a criminal judge may be appealed against at the Higher State Court (Landgericht) or by appealing directly to the Supreme State Court (Oberlandesgericht). A judgement by a court of lay assessors may only be appealed at the Higher State Court. Decisions on appeals by the Higher State Court may be appealed at the Supreme State Court. A judgement in first instance by the Higher State Court can only be appealed at the Federal High Court, which has 5 professional sitting judges.

The judgement will not become final if legal remedies have been applied for. It is important to observe and obey the statutory deadlines. An appeal may be lodged within one week of a judgement being handed down, the latter will be final afterwards. The case is transferred to the responsible Higher State Court upon lodging an appeal. The lawfulness of the judgement will be re-assessed. An appeal may result in the termination of proceedings, an acquittal or a sentence. The accused is however protected from the sentence being increased, if the appeal was lodged by him and not by the public prosecutor.

In addition to criminal prosecution, the accused also faces financial consequences which arise from the derivation of taxation aspects by the Tax Authority during the trial. The defence must aim at warding off alleged amounts or reduce them, in order to mitigate any financial ramifications.  

It must initially be clarified, if a tax claim by the Tax Authority is actually legally justified. This presupposes precise information on the amount of the alleged tax debt, who was obligated to report it to the Tax Authority, to which assessment period it is allocatable and in which country it was earned.

In the case of impending, completed or renewed enforcement measures - usually by way of seizure or garnishment - the tax attorney will try to achieve a stay of enforcement for the purpose of establishing the inaccuracy of the assessed taxes.

The notion that criminal tax proceedings will only lead to the payment of the back taxes, that would have been payable if the statutory requirements were complied with in the first place, is usually misguided. The prosecution authorities frequently use arbitrary assessments to achieve a result exceeding the actual tax loss. As explained above (defence strategy for criminal tax proceedings), the defence must aim at reducing this additional amount, also because it forms the basis for the calculation of interest on taxes withheld.

In addition to arbitrary assessments, the defence against freezing injunctions is another legal battlefield. Freezing injunctions have the effect of freezing liquid funds of the accused, which makes a defence difficult or even impossible. It seems that freezing injunctions are sometimes used to coerce the accused’s willingness to cooperate. It is however neither in the interest of the accused nor of the Tax Authority to go down a path of maximum confrontation. The goal should be to come to an agreement with the accused. 

An active and alert defence attorney is indispensable in the lead-up, which will also consider a realistic assessment of the available defence options and available options to end the proceedings. The goal should be a settlement in both the taxation and the criminal matter.

The legal link between taxation and criminal proceedings must generally be considered on a case-by-case basis. It is possible to suspend criminal proceedings under § 396 AO until the taxation proceedings have established, whether any tax liability actually exists. Vice versa, taxation proceedings may be suspended until criminal proceedings have been concluded, e.g. when the precise circumstances of a tax fraud hold significance for the proceedings pending at the Fiscal Court.

Particularly relevant is the fact, that a suspension of criminal proceedings under § 396 AO, which foots on doubts about the actual circumstances of the offence allegedly committed instead on legalistic objections, will result in a continuation of the limitation period and the proceedings will eventually become time-barred.

In summary, it is noted, that the prospects are improved by the accused seeking to establish contact with the Office for Fines and Criminal Matters, or the tax investigator, as soon as possible via his attorney upon learning of proceedings being commenced. Which options may be available for an early end or a termination of the proceedings depends on the individual case. The accused should refrain from making rash statements but rather contact a defence attorney specialised in tax law and criminal tax law immediately and discuss the further procedure.