Tax Disputes Guide in Germany

Tax investigations are typically triggered by high income, unusual deductions or suspicion of tax evasion. Commercial or self-employed taxpayers, as well as employees or individuals exceeding EUR 500,000 in annual income, attract closer scrutiny. Authorities usually announce audits by letter, specifying the scope and timeframe. To limit or avoid audits, maintaining meticulous documentation and conducting voluntary disclosures are effective. Engaging tax advisers, ensuring proper bookkeeping and regularly reviewing filings help minimise risk.

Usually, tax authorities can audit and reassess tax returns up to 4 years after the end of the calendar year in which the tax arose. If a tax return was filed, the period starts after the end of the calendar year in which the return was filed. Further events triggering the start of the limitation period must be observed, e.g. failure to submit a tax return despite being required to do so. This period can be extended to up to 10 years in cases of tax evasion, while negligent misdemeanours allow for a 5-year limitation. The limitation period may be suspended if the taxpayer and the authorities are engaged in ongoing negotiations or disputes, thereby extending these temporal boundaries.

Tax authorities have broad powers during investigations. They can conduct audits, request information and inspect business premises and seize records if there is suspicion of tax fraud or evasion. Authorities are also permitted to request information from third parties, such as banks and employers, but they cannot pass information to third parties outside the tax procedure. Unannounced dawn raids are possible and taxpayers are advised to prepare for such events.

Taxpayers have the right to a fair hearing during a tax audit. They must be informed of any relevant findings and may request a final meeting before amended notices are issued to raise objections. Representation by advisors is permitted at any time. Sensitive documents – such as internal emails or confidential strategy papers – may be refused or submitted in neutralised form if not tax-relevant. Communication with professionals bound by secrecy is protected unless disclosure is legally required. Private and business premises may only be entered with a court order. Appeals can be lodged against tax assessments based on audit findings.

Tax violations can result in interest and fines in addition to the payment of taxes. If tax returns are not submitted on time, late filing penalties may apply. In the context of tax audits, penalties for delay in cooperation may also be imposed if cooperation obligations are not fulfilled in a timely manner. Particularly serious violations such as tax evasion lead to extended limitation periods and can be punished with fines or imprisonment. All penalties can be challenged by filing an appeal or a lawsuit.

Tax litigation starts with an objection to the tax assessment, which must be filed within 1 month. The tax authorities review the case and may resolve it amicably. The objection department of the tax authorities review the case and potentially discuss it with the taxpayer. The department aims to resolve the dispute amicably and the process is free of charge for the taxpayer. Depending on the complexity, it may take several months.

If administrative objection remains unresolved, the taxpayer can appeal to the Local Tax Court within 1 month of the objection decision. Note that these actions do not suspend the disputed administrative act, i.e. taxes must paid unless separately suspended.

As neither the submission of an objection nor the tax court litigation suspend the disputed administrative act, the tax office can enforce the tax assessment, and non-payment triggers late payment penalties at 12% per annum.

Taxpayers can apply for suspension of enforcement of a disputed tax assessment if serious doubts exist as to its legality or if enforcement would cause undue hardship. Suspension is granted upon application and prevents immediate collection, though interest may accrue at 6% per annum if the taxpayer’s objection/appeal to the court is not successful eventually.

Formal alternative dispute resolution mechanisms are not established.

If administrative objection is denied, a taxpayer can appeal to the Local Tax Court within 1 month. Costs are borne by the unsuccessful party (e.g. an amount in dispute of EUR 100,000 triggers court fees amounting to approximately EUR 5,000).

Further appeals to the Federal Tax Court are possible if admitted by the Local Tax Court; if not admitted, non-admission can be appealed (the success rate is approximately 14%). The amount mentioned above triggers Federal Tax Court fees at approximately EUR 8,000.

The Federal Constitutional Court decides solely if rulings by the Local or the Federal Tax Court violate constitutional rights, i.e. it is not a third instance and does not focus on the tax law matter itself.

There have not been any recent changes or developments that have significantly influenced the local tax dispute landscape in Germany. The environment remains stable, with no notable legislative updates, regulatory shifts, or high-profile cases impacting current practices.

In facing a tax dispute in Germany, it is crucial to maintain meticulous records and documentation and seek early legal advice to navigate administrative and judicial phases effectively, ensuring timely objections and appeals to prevent automatic enforcement of disputed tax assessments and so maintain a taxpayer’s liquidity.