Tax Investigations and Customs Audits at a Company

By Dr. Julius Hagen, Attorney at Law

When a tax audit can become a criminal investigation

A tax or customs audit often starts with an apparent irregularity: a different tariff classification, a disputed customs value, missing origin documents, undeclared turnover or unclear import VAT. To the company, this may initially look like a question of reassessment. The same finding can, however, become the starting point for a tax criminal or regulatory offence investigation.

Management therefore needs to know more than which documents the authority requests. The critical question is whether the authority is establishing the tax base, pursuing a specific suspicion or combining both functions. That determines cooperation duties, statement strategy, data production and how earlier explanations may later be assessed in criminal proceedings.

The dual role of tax and customs investigations

Section 208 of the German Fiscal Code assigns several tasks to tax and customs investigations. They investigate tax crimes and regulatory offences, establish the tax base in those cases and uncover unknown tax cases. Tax investigation is therefore not limited to an offence that has already been established. The specific powers depend on the task being performed and the procedure involved. A customs audit by the main customs office must be distinguished from this: it is initially a tax or customs assessment procedure, whereas customs investigation operates in criminal or regulatory-offence investigations. The two levels may overlap, but they do not follow the same procedural rules.

Where a tax crime is suspected, the financial authority generally investigates under section 386 AO. This may include the tax office, the main customs office or another competent financial authority. The authority may conduct the investigation itself or transfer it to the public prosecutor. The company should therefore establish early whether the authority is conducting a tax audit, a criminal investigation or using powers arising from both functions.

Tax assessment and criminal proceedings follow different rules

Tax assessment proceedings concern assessment, additional tax, interest and the establishment of the tax base. They involve cooperation duties. Criminal proceedings concern suspicion, intent or gross negligence, personal responsibility and sanctions. Section 393 AO therefore provides that the rules applicable to each procedure govern the rights and duties of the taxpayer and the authority.

Section 393(1) AO protects against compulsion to incriminate oneself: coercive measures may not be used in tax proceedings where they would force the taxpayer to incriminate themselves for a tax crime or regulatory offence. Information lawfully obtained by the financial authority or public prosecutor in criminal investigations may be used in tax proceedings under section 393(3) AO. Earlier tax statements require a separate assessment of the purpose for which they may be used; section 393(2) contains a specific restriction concerning non-tax offences. This protection is not a general right to remain silent for every person in the company. The individual procedural position of management, employees and other information providers, and the risk of self-incrimination, must be assessed separately.

This can arise when an audit identifies undeclared turnover, when a customs audit produces a different customs value or when preference documents are missing. The financial correction and the criminal question who knew what and who caused the entry are separate inquiries. They must be coordinated without being collapsed into one spontaneous statement.

What the authority may infer from company records

Tax and customs authorities rarely assess only one document. They combine tax returns, customs declarations, invoices, emails, freight records, delivery terms, account movements, ATLAS data, product descriptions and work instructions into a timeline and organisational account.

An objectively incorrect entry does not show who caused it. A wrong customs value may result from a data-transfer error, unclear responsibilities or a deliberate omission. Personal attribution turns on roles, information, approvals and specific communications. The documents must therefore be tested for the evidential chain connecting the discrepancy to a person.

Producing data and managing communication inside the company

Tax and customs investigations may have broader investigative powers than ordinary tax fact-finding. Documents may be requested directly, business premises inspected and information from several functions combined. Data should therefore be produced in a controlled way: completely, traceably and without adding legal explanations that have not been assessed.

Informal conversations about how an error arose are risky. Statements that a tariff number had always been used, that management knew nothing about the details or that an internal shortcut was standard practice may later be read as indications of knowledge, indifference or organisational failure. Internal communication should therefore preserve responsibilities instead of prematurely creating one uniform account of events.

Correction under section 153 AO and voluntary disclosure under section 371 AO

If a taxpayer later recognises that a filed return is incorrect or incomplete and that tax may have been reduced, an immediate correction under section 153 AO may be required. This is not the same as a voluntary disclosure. A voluntary disclosure under section 371 AO must cover all unexpired tax offences of the relevant tax type and at least all offences of that tax type within the last ten calendar years. Notification of an audit order, the appearance of an official for a tax audit or to investigate a tax crime or regulatory offence, notice of the initiation of criminal or regulatory-offence proceedings, discovery of the offence known to or reasonably expected by the person concerned, or other blocking events may exclude exemption from punishment in whole or in part.

In a corporate case, it must also be established who will make the filing, which periods and taxes are affected and whether the correction must describe causes or responsibility. A filing that corrects the tax amount has a different function from a statement admitting intent. Before anything is submitted, the tax duty, any exemption from punishment and personal attribution must be assessed separately.

Customs audits, customs value and import VAT

In cross-border transactions, tariff classification, customs value, origin, preferences, delivery terms, royalties, transfer pricing and freight costs may affect import duties. For import VAT, it must also be established which importation and customs value form the basis of assessment. A later reassessment does not by itself show an unintentional processing error or a criminally relevant act.

The criminal assessment will often turn on whether relevant information was known, who caused the declaration and how earlier customs warnings were handled. The importer, customs representative, freight forwarder and management may have different areas of knowledge and responsibility. Detailed analysis of individual customs offences belongs on the customs-law neighbour pages; this page focuses on coordinating the procedures within the company.

Remedies, access to the file and parallel proceedings

The next steps depend on whether the company faces a tax assessment, audit finding, request for information, formal criminal investigation or search measure. Tax remedies, proceedings before the tax courts, criminal defence and review of enforcement measures pursue different objectives. They should not be merged by turning a tax submission into a criminal defence statement.

Investigations against management or employees, proceedings involving the company, internal fact-finding, customs measures and later corporate sanctions may run in parallel. Statements, data and assessments of responsibility must not circulate between these procedures without control. The framework for tax assessment and criminal proceedings, tax criminal defence, detailed customs issues and corporate fines are addressed on the related pages.