Correction of the Tax Assessment After an Audit – BFH III R 14/22
If profit is determined using the income-excess method, the manner in which the taxpayer has maintained their records, which only came to the attention of the tax office through an audit, can lead to a correction of a final tax assessment. The Federal Fiscal Court (BFH) decided this in a ruling on May 6, 2024 (Ref.: III R 14/22).
The amendment of a final tax assessment is possible if it is certain that the taxpayer did not record business income. This can come to light, for example, during an external audit, according to the commercial law firm MTR Legal Rechtsanwälte, which also advises on tax law. In its current ruling, the BFH has gone a step further and made it clear that the way the taxpayer has maintained their records can also justify the amendment of a final tax assessment.
Deficiencies Discovered During External Audit
The plaintiff in the underlying case was a retailer who determined their profit using the income-excess method. Initially, the tax office assessed the retailer according to their application, without the reservation of a subsequent audit. During a later audit at the retailer’s premises, the tax office criticized the retailer’s records as formally deficient. The retailer used an electronic cash register, which displayed five product groups on the daily printed Z receipts. No further breakdown or recording of sales by individual products was carried out. The retailer occasionally made handwritten corrections on the Z receipts. Additionally, daily cash reports were maintained.
The tax office criticized that the retailer had not sufficiently complied with their record-keeping obligations under § 22 of the German Value Added Tax Act (UStG), as they had not recorded all business transactions in chronological order and with their correct content. It was not clear whether the retailer had correctly separated sales subject to different tax rates and applied the appropriate tax rate. Although the retailer was not obliged to keep a cash book, they had done so voluntarily. Even a voluntarily maintained cash book must meet legal requirements. In this case, the cash book was kept in the form of Excel spreadsheets, which are not protected against subsequent changes. This does not meet legal requirements.
Additional Estimate by the Tax Office
As a result, the external audit led the tax office to make an additional estimate of 10 percent of the cash proceeds for the years in question. The tax office justified the subsequent amendment with § 173 (1) No. 1 of the Fiscal Code (AO). According to this, tax assessments are to be revoked or amended if subsequently discovered facts or evidence lead to a higher tax.
The retailer objected to this and was partially successful with their lawsuit at the Fiscal Court of Lower Saxony. However, in the appeal process, the BFH overturned the decision. The Fiscal Court had wrongly assumed that § 173 (1) No. 1 AO only allowed for the amendment of final tax assessments if it was certain that the taxpayer had not recorded business income. Rather, the manner in which the taxpayer kept their records could also lead to the revocation or amendment of the tax assessment according to § 173 (1) No. 1 AO, the judges in Munich ruled.
This applies to records of goods received as well as to other records or the remaining collection of receipts if the taxpayer determines their profit using the income-excess method, the BFH further explained.
Manner of Record-Keeping is Relevant
However, the Federal Fiscal Court could not decide whether an amendment of the tax assessment was justified in the underlying case, as there were no sufficient findings from the Fiscal Court of Lower Saxony. Not only whether the taxpayer recorded their cash receipts but also how they did so is significant for the decision, the BFH emphasized. The tax office may have the authority to estimate even if there are only formal deficiencies in the records of cash receipts. The Fiscal Court of Lower Saxony must now examine whether the plaintiff’s records have deficiencies that justify an additional estimate, according to the BFH.
MTR Legal Rechtsanwälte advises on questions related to audits and other tax law issues.
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