Audit: this is how you negotiate successfully with the tax office!

In an audit by the tax office, there are various ways to positively influence the result. Measures can be taken at an early stage to prevent a potential operational audit. Especially in tax arrangements, where uncertainties in the context of tax determination seem likely, one can proactively contact the tax official. Many financial officials are grateful for explanations, because they also save time. However, if a tax office actually arranges an audit, then one should be cooperative. However, you should always consult with an experienced tax consultant who can estimate which documents and information are actually necessary and which ones should be taken out of focus. Finally, a tax consultant should also conduct the negotiations with the external auditors. There are often differences between the effects of individual aspects. Which one can safely give up as a negotiation object and which one should be defended as far as possible is therefore crucial in a final meeting. But tactical skill may also help here.

If a tax office carries out an audit according to § 193 AO in a company and finds deviations from the previously established tax, different consequences can occur. On the one hand, new facts previously unknown to the tax office before the audit can occur. This can either be based on an accidentally disregarded fact or have been intended. In addition, an estimate may be required. Furthermore, in some cases there can also be different legal views. Particularly with special tax arrangements, controversies often arise.

All this can potentially lead to retroactive taxation. Therefore, as a rule, already in the course of the audit, but at the latest at the final meeting, a discussion of the findings of the tax office takes place. Here, entrepreneurs and their tax consultants can defend their views and negotiate with the external auditor. Individual agreements are often reached. Otherwise, only two alternatives remain: either the tested entrepreneur accepts the results, or he proceeds against them.

In our contribution, we address some aspects that are important when negotiating with the tax office in the context of an audit. They help to draw the best possible result from the negotiations.

The best strategy for an audit by the tax office is to avoid it from the outset. If you have a tax-relevant situation in the company, in which you basically already suspect when preparing the tax return that this may lead to uncertainties, then you can take a preventive action to an audit by seeking talks with the responsible tax officials before the tax is determined.

So you can call the tax office a few weeks after filing the tax return and ask the clerk if there are any open questions that you should clarify. If this is indeed the case, you can be sure that financial officials like to take advantage of this opportunity. Finally, it can potentially help to avoid later clarification attempts on the part of the tax office in the context of an audit. Finance officials also like to save time.

This procedure, with which one can try to avoid an audit by the tax office, is particularly applicable to special tax arrangements. As an alternative, you can also request binding information beforehand, but this is subject to certain conditions and costs both time and money. Therefore, many tax consultants often choose the other, here presented way.

Nevertheless, there may also be an audit by the tax office for other reasons. In this case, we would now like to discuss what measures and behaviour should be taken in dealing with the auditors in order to be satisfied with the result in the end.

An important point in an audit by the tax office is the cooperation with the tax officials. Therefore, one should always provide all requested documents and information in a timely and open manner. But with all openness, a certain degree of caution is also required. So you should always be in exchange with an experienced tax consultant, who accompanies the associated steps. He is often in the picture and knows what information should be made available to external auditors in order to meet their information needs. In addition, the way in which the documents and information are made available to external auditors can also have an advantageous influence on the audit result. A tax consultant also understands when and why an external auditor shows interest in certain matters. This may enable a more appropriate response than an entrepreneur who lacks the necessary background knowledge could in such a situation.

Those who expect to be accommodating in the end should consider beforehand that the prerequisite for this is openness and honesty. If one has made a statement about once, it is therefore nonsensical to deny this later. Of course, it can come in the course of an audit to disadvantageous statements to the tax office. But one has to distinguish exactly whether this is merely a misunderstanding or an obvious attempt to revise a previously established fact. Because with a pure misunderstanding, there is a logical explanation that also shines right away, without having to use complex or otherwise hardly comprehensible circumstances. And anyone who gets involved in contradictions has lost any moral credit rating. For example, the loss of documents due to severe weather conditions is much easier to understand than if one would claim that a pet had destroyed them (possibly even repeatedly).

With sincerity, you can therefore collect plus points, which may well lead to a concession by the tax office in the negotiations following the audit – at least to a certain extent. How it can continue in the final discussion, we see in the next chapter.

Before external auditors write a final report on an audit, they hold a final discussion with the entrepreneurs or managing directors of the audited company. They explain their findings and the associated tax implications.

This is the last opportunity for the affected entrepreneurs to rectify certain aspects before the results lead to changes in tax assessments. This is also the best opportunity to engage professionally with external auditors about conflicting points of view. In doing so, one should always keep an eye on whether the respective situation may only temporarily cause a tax, which loses relevance anyway due to future developments. For example, inappropriate special depreciation means only a temporary impact on the total depreciation amount. The release of provisions is also a good example, because they are already pending in the future and are therefore inevitable. Such issues can therefore be used in the negotiations as a counterweight for positions that one would definitely like to resolve in one's own sense. In this way, a less significant part of the bargaining power is granted to the tax office in order to secure a more significant one.

Another important aspect of final discussions with the tax office is pending if an estimate should be made based on the audit. In such a case, none of the parties involved can invoke objective criteria for taxation, because there is no legal certainty in compliance with the law. After all, in reality, the taxation of companies often deviates appreciably from the ideal conditions to which laws claim validity. Nevertheless, taxation is also inevitable in such situations. So it is helpful in such cases if you first gave the impression of sincere cooperation. As a result, the final discussion gives rise to the possibility of influencing the estimate and thus the possibly associated tax back payment.

By the way, this is a nice example of a situation in which it is worth sacrificing another aspect, because you can gain more tax-wise.

In addition, the final discussion can be used for tactical manoeuvres to avoid the taxes determined by the tax office as part of the audit. For example, in the case of relatively small amounts, for which one has different tax conceptions regarding their validity, one can indicate that one intends to appeal. In this case, it would be difficult for the external auditors to justify internally the associated consequences, namely the time required for such a procedure also for the tax office.

It is likely to behave similarly when it comes to particularly complex situations in which European law may be affected. Here, too, tax officials weigh critically whether the tax amount they calculate is worth the expense of an extended legal dispute, which could possibly reach the Federal Finance Court as far as the European Court of Justice.

In short, you should always keep the perspective of the tax office in mind and include this attitude in your own procedure. This is actually a big advantage that taxpayers have over the tax administration when it comes to a dispute over the result of an audit with the tax office. But this is only possible with a certain technical view. However, such a view and the ability to derive insights and corresponding reactions from it can best be expected from an experienced tax consultant. Also for this reason, the generally valid recommendation to always involve a tax consultant in an audit by the tax office applies.