date | theme

8. November 2017 | Gift Tax & Gift Tax Declaration

21. September 2021 | Separate determination according to § 180 AO: Requirements and legal consequences

7 December 2021 | Self-assessment and control by the risk management system

31. January 2022 | Supplementary balance sheet: What is to be considered here and what consequences are linked to it?

11. March 2022 | Balance sheet adjustment vs. balance sheet change: Correct tax balance (this contribution)

Erroneous tax balance sheets can be corrected by way of the balance sheet change in accordance with § 4 (2) EStG. On the one hand, it is possible to correct an originally erroneous balance sheet. On the other hand, an originally correct balance sheet can be changed. We explain how error corrections are to be made, when there is an error at all and when a balance sheet change is considered.

The law does not differentiate linguistically between a balance sheet change and a balance sheet adjustment. Nevertheless, balance sheet changes and balance sheet adjustments are understood differently.

In the case of an incorrect balance sheet, § 4 (2) half sentence 1 EStG allows the taxpayer to make an adjustment to the balance sheet even after the balance sheet has been submitted to the tax office, if the balance sheet is incorrect. In principle, an error exists if the accounting or valuation violates the commercial law principles of proper accounting or other individual standards of the Income Tax Act, e.g. provisions norms or commercial law. It is irrelevant whether the violation was accidental or deliberate. In addition, errors can occur both on the asset side and on the liabilities side of the balance sheet. The faulty approach shall then be replaced by the correct approach.

In contrast, in the event of a change in the balance sheet, the taxpayer replaces a permissible and correct balance sheet approach with another permissible balance sheet approach. Therefore, for example, with regard to an accounting option right, only one balance sheet change comes into consideration. Consequently, the change in the balance sheet is not essentially about giving the taxpayer room for manoeuvre, but about maintaining the horizon of expectation of the initial choice in connection with previously unforeseeable results.

However, the assessment of a balance sheet error often proves to be problematic because, in the context of accounting, assessments and forecasts of factual circumstances are often necessary, but can be subject to change. Consequently, not everything that subsequently turns out to be wrong can be classified as an error or recognizable from the ex ante perspective of the inventor at the balance sheet date. Especially in forecasting decisions, there are various accounting approaches and valuation approaches. Such decisions exist, for example, for the recognition and evaluation of provisions. For this reason, despite careful and objective factual compilation and legal analysis, various reasonable options for accounting approaches and valuation approaches often remain. In addition, BFH can also classify a correction by the tax office as erroneous in the context of an audit and declare the original accounting as correct. The detection of an error therefore proves to be complicated.

Despite these problems, the law does not contain a legal definition of the term error. Consequently, the BFH had to specify the concept of error in order to solve the problems listed in connection with forecast assessments.

Accordingly, the BFH focuses on the “objective concept of error” for accounting legal questions and on the “subjective concept of error” for factual questions. In the context of the subjective concept of error, the date-related knowledge of a carefully assessing merchant with his assessment prerogative is decisive. If this had been taken into account in the same way, there would have been no error. In contrast, in the case of the objective concept of error, only the objectively applicable legal situation at the reference date is the basis for the assessment. However, the objective legal situation may not be established until years later, so that this concept of error also shows problems. These arise in particular in extra-tax legal issues.

2.3. Extra-tax legal matters

In principle, there is only one valid legal assessment for the assessment of a legal question. Of course, this can change over time. Of course, it can also be about non-tax legal issues, for example whether guarantee rights exist in a case or not. The assessment of civil offences can therefore have a fact-like character in accounting decisions, in particular in the question of whether provisions are to be made for future warranty requests. Consequently, the question arises as to whether a later deviating court valuation justifies a balance sheet entitlement (objective concept of error), although the valuation originally made was acceptable (subjective concept of error).

First of all, a subjective error concept suggests that civil law issues are pre-emptive of and underlying a balance sheet approach. They therefore do not concern the accounting as such, but determine the present situation. Therefore, they are more attributable to the factual context. Thus, legal and factual issues can no longer be distinguished completely separately from each other. Nevertheless, it seems appropriate to assign extra-tax legal questions to the subjective concept of error. Therefore, the balance sheet is only wrong and requires a balance sheet adjustment if the approach was not acceptable from the point of view of a proper and careful merchant.

The balance sheet change is permissible according to § 4 (2) sentence 2 EStG, however, only if it is in close temporal and factual connection with a balance sheet adjustment and only to the extent that the impact of the balance sheet adjustment on profit. Accordingly, it is necessary that balance sheet adjustments and balance sheet changes relate to the same balance sheet.

These restrictions do not apply before the taxpayer has even submitted his balance sheet. Therefore, the taxpayer can change the balance sheet approaches at will until the submission to the tax office. However, an adjustment or change in the balance sheet is no longer permitted if the balance sheet approach affects tax assets that have been established or are statute-barred.

Professional advice for the preparation of annual accounts and tax returns?

In the context of trade balance corrections, one speaks of a change in the annual accounts. The correction of error-free financial statements is subject to narrow limits with regard to creditor protection and the information function. Therefore, changes can only be considered for important legal, economic or tax reasons. Consequently, the correction is only required if the error is weighty in terms of amount or report. In addition, the picture of the company’s assets, financial position and profit or loss must be presented incorrectly without the correction. The new assessment must therefore be acceptable from the point of view of a proper and conscientious merchant at the time of drawing up the balance sheet. Invalid financial statements must always be replaced retroactively by effective financial statements, unless time has elapsed.

In principle, the taxpayer may adjust the balance sheet in the sense of a right to vote. In individual cases, however, he may be obliged to adjust the balance sheet, for example if he declares the errors in the balance sheet by self-disclosure or he recognizes that a balance sheet approach is faulty in his favor. Then he must report this together with the corrected tax return to the tax office. However, if such an obligation does not exist on the part of the taxpayer and the tax office deviates incorrectly from the balance sheet, this accounting error does not become part of the relevant tax balance sheet. They should therefore contest the relevant adjustment notice with an objection.

If, however, errors are not detected until an external audit has been carried out, the correction must be carried out if the tax assessment has not yet been carried out or if it is final. The incorrect balance sheet approach shall be adjusted at the reference date at which the error was made. Therefore, in the case of non-existing tax determinations, no procedural obstacles prevent the correction.

However, the change in the balance sheet of existing tax determinations proves to be problematic. These may only be changed if a correction possibility according to §§ 172-174 AO comes into consideration. Accordingly, the change in balance sheet can no longer be based on § 4 (2). Rather, a continuing incorrect balance sheet approach must be corrected in the first closing balance sheet which is still open. Thus, an error is transported into a year in which the decision can still be corrected or its claim is not yet statute-barred.