Tax Audit: Process, Rights, Obligations, and Risks for Companies

Support during Tax Audits – Legally Secure Guidance Throughout the Tax Audit Process

The announcement of a tax audit regularly raises practical and legal questions in companies. Which documents must be submitted? What cooperation obligations exist? What rights do companies have against the tax authorities? What deadlines must be observed? And what financial and tax risks can arise from the audit?

These questions are justified. Tax audits deeply interfere with tax matters and business processes. Particularly in the area of German VAT law, complex transactions, cross-border service relationships, documentation deficiencies, or legal uncertainties often lead to discussions with the tax authorities.

Early preparation and structured support during the tax audit help to identify risks, properly respond to inquiries from the tax authorities, and effectively defend tax positions.

What is a Tax Audit?

The tax audit – legally referred to as an external audit – is conducted by the tax authorities for the purpose of examining a company’s tax affairs (sec. 194 of the German Fiscal Code (GFC)). It may cover one or more tax types, one or more tax periods, or restrict itself to specific tax-relevant issues.

The legal foundations of the tax audit are primarily found in secs. 193 et seq. GFC. They regulate, among other things, the order of the tax audit, the cooperation obligations of the company, and the rights and duties of those involved. Additionally, the previous Tax Audit Regulations (Betriebsprüfungsordnung – BpO 2000) and, in the future, the new External Audit Regulations (Außenprüfungsordnung n.F.– ApO n.F.), contain provisions for the practical execution of external audits.

The aim of the tax audit is to verify whether taxes have been accurately declared and assessed. The audit may cover VAT, corporate income tax, trade tax, income and payroll tax. Depending on the company's structure and business activities, other tax types or tax-relevant facts may also be subject to examination. These include customs law issues, insurance tax, energy and electricity tax, as well as other excise tax matters.

During the audit, the tax authorities analyse, among other things, bookkeeping, tax records, contracts, invoices, internal processes, and procedural documentation. In German VAT law, key areas of focus include input VAT deduction, tax exemptions, intra-Community supplies, chain transactions, and cross-border service relationships.

When is a Company Likely to Face a Tax Audit?

In principle, companies, freelancers, and under certain conditions, other taxpayers can be subjected to a tax audit (sec. 193 GFC).

Large companies are regularly audited. For small and medium-sized enterprises, tax audits are usually conducted less frequently. Furthermore, specific circumstances, irregularities, or tax risk areas may trigger a tax audit.

The tax authorities decide, based on their own discretion, whether and when an external audit will be conducted. The selection of cases will, in the future, become increasingly more risk-oriented. At the same time, the tax authorities aim to promote timely tax audits. External audits should therefore be carried out as soon as possible after the relevant tax periods have ended and be efficiently concluded. In doing so, the scope and duration of the audit should be limited to a necessary extent and focused on tax-relevant risk areas (sec. 2 paras. 2 to 4 ApO n.F.).

The tax authorities do not fully disclose the selection criteria of an audit. Therefore, companies should always ensure that their tax processes, records, and documentation are prepared for audit scrutiny.

How Does a Tax Audit Work?

Audit Order

A tax audit begins with an audit order issued by the tax authorities (sec. 196 GFC). It specifies, in particular, the affected tax types, the audit periods, and the scope of the audit.

The audit order should also contain the legal foundations for the external audit, specific audit focus areas if applicable, as well as notes on the subject company’s essential rights and obligations (sec. 6 ApO n.F.). Usually, the audit order should give companies sufficient time to prepare for the audit. For large companies, an announcement period of four weeks typically applies, while in other cases, two weeks is more usual (sec. 6 para. 5 ApO n.F.).

The audit order is an independent administrative act. Legal remedies against it can be filed under specific legal conditions.

The announcement of an audit order can also impact the tax assessment deadline and delay its expiration (sec. 171 para. 4 GFC). This means that tax assessments can still be amended for earlier tax periods. For audit orders announced after 31 December 2024, the suspension of the limitation period is generally limited and regularly ends no later than five years after the end of the calendar year in which the audit order was announced. The new rules are intended to promote more timely tax audits and to facilitate their faster completion.

Preparation for the Audit

After receiving an audit order, companies should analyse the affected issues, compile relevant documents, and identify potential risk areas.

Conducting the Audit

During the audit, the auditor evaluates documents, asks follow-up questions, and may request additional information or data.

Companies must provide the necessary documents and requested information, and allow the legally mandated data access. The cooperation obligations arise primarily from sec. 200 GFC.

The external audit is generally conducted on the company's premises. If documents are provided to the tax authorities digitally, they may be stored and processed on a secured data processing system (sec. 7 ApO n.F.).

Closing Meeting

If the audit findings lead to changes in the tax bases, a closing meeting will take place (sec. 201 GFC). At this meeting, companies can discuss the essential findings with the tax authorities and present their factual and legal arguments.

Audit Report and Amendment Notices

The results of the tax audit are documented in an audit report. Legal remedies are not directed against the audit report itself but rather against the tax assessment notices which are issued based on the audit.

What Rights Do Companies Have During a Tax Audit?

During a tax audit, companies not only have cooperation obligations, they also have a range of procedural rights.

In particular, companies have the right to be informed about the scope and subject of the audit, to involve advisors, to comment on audit findings, to conduct a closing meeting where the audit findings result in adjustments, and to file objections against amended tax assessment notices.

Moreover, a postponement of the audit start can be requested for important reasons. Such a request can generally be made informally. Important reasons may include the illness of a person who is necessary for the audit, significant operational impairments due to renovations, or similar extraordinary circumstances (sec. 6 para. 6 ApO n.F.). Under certain conditions, the tax authorities may make the postponement subject to preparatory cooperation actions.

Under certain conditions, companies can apply for a binding ruling after the completion of a tax audit (sec. 204 GFC). A binding ruling is an important instrument, which serves to reliably secure the tax treatment of matters already audited for future tax periods as well, providing additional legal and planning security and preventing the need for future discussions with the tax authorities.

What Cooperation Obligations Exist During a Tax Audit?

Companies are required to cooperate during the course of a tax audit.

This includes cooperation regarding the submission of books, records, contracts, invoices, and other tax-relevant documents. Additionally, requested information must be provided, and tax-relevant data must be made available.

Digital bookkeeping and archiving systems are of particular importance. Companies should ensure that tax-relevant data is complete, traceable, and audit-ready.

Must a Company Answer all of the Auditor’s Questions?

Companies must contribute to the clarification of tax-relevant matters (sec. 200 GFC). However, the cooperation obligations only apply within the limits prescribed by law.

Requests for information and the submission of documents should be carefully reviewed. This is especially important in cases of complex legal questions or extensive data evaluations.

Coordinated communication helps to ensure that facts are presented consistently and in a legally sound manner.

What Changes Apply to Tax Audits from 2025?

The reform of the external audit regime is based on the Act implementing the DAC7 Directive and modernising tax procedural law of 20 December 2022 (BGBl. I 2022, p. 2730) (see KMLZ VAT Newsletter 02/2025. The new regulations are subject to various transitional provisions. Many of these changes are particularly relevant to tax audits for which an audit order was issued on or after 1 January 2025. However, some regulations may also be of significance for previously ordered audits.

The reform is also accompanied by the replacement of the previous Audit Regulations (BpO 2000) with the new External Audit Regulations. The new External Audit Regulations aim to implement the legislative changes at the administrative level and promote a more risk-oriented, timely, and more structured approach to external audits. The German Federal Council (Bundesrat) approved the General Administrative Regulation for External Audits – External Audit Regulation (Außenprüfungsordnung – ApO n.F.) – on 10 July 2026; publication in the Federal Tax Gazette is still pending.

The reform aims to make tax audits faster and more efficient. At the same time, the cooperation and correction obligations of companies have been expanded.

Qualified Cooperation Request

Under certain conditions, the tax authorities can issue a qualified request for cooperation (sec. 200a GFC).

Companies must provide the requested information within the statutory deadlines.

Penalties for Delayed Cooperation

In cases of late cooperation, a penalty can be imposed according to sec. 200a para. 2 GFC.

For large companies, additional surcharges may apply. As a result, deadline management, documentation, and timely processing of audit inquiries become significantly more important.

Expanded Correction Obligations

Audit findings may impact additional tax returns.

Companies should therefore assess whether additional corrections are required as a result of the audit findings.

Partial Tax Assessment Notice

Under certain conditions, individual and separable tax bases may already be determined during the ongoing tax audit through a partial tax assessment notice (sec. 180 para. 1a GFC).

This allows contentious issues to be clarified early without having to wait for the conclusion of the entire tax audit.

Additionally, sec. 204 para. 2 GFC provides for the possibility of obtaining a binding ruling for comparable future matters after the issuance of a partial tax assessment notice.

Framework Agreements and Structured Audit Process

The tax authorities and companies can enter into written framework agreements regarding the conduct of the tax audit. These can outline communication channels, response deadlines, meeting dates, audit focus areas, as well as a timeline for the audit. The goal of such agreements is to create a more transparent and efficient audit process (sec. 8 ApO n.F.).

What Risks Are Associated with a Tax Audit?

The financial and legal consequences of a tax audit can be significant.
Key risks include:

• tax assessments resulting in additional tax liabilities, particularly due to the denial of tax exemptions or input VAT deductions, differing views on whether transactions are taxable, or the application of an incorrect tax rate,

• interest according to sec. 233a GFC,

• estimates according to sec. 162 GFC,

• penalties for delayed cooperation and possible surcharges pursuant to sec. 200a GFC,

• subsequent criminal or administrative offence proceedings.

In practice, significant risks often arise from insufficient evidence, lack of procedural documentation, and uncoordinated responses to the tax authorities.

Which Topics Are Most Frequently Examined During Tax Audits in German VAT?

Tax audits frequently focus on recurring VAT issues. 

These include, in particular, input VAT deduction, tax exemptions, the correct determination of the tax rate, intra-Community supplies, chain transactions, cross-border services, the determination of the place of supply, and VAT groups. Additionally, tax audits often focus on complex intra-group service relationships, offset transactions within corporate groups, and the tax treatment of international business transactions. Procedural documentation and digital bookkeeping and archiving systems also play an important role in audit practice.

How Can Companies Optimize Their Preparation for a Tax Audit?

Preparation for a tax audit should begin long before the audit order is issued.

Companies should continuously document their tax processes and ensure that business transactions are documented in a clear and traceable manner. Comprehensive procedural documentation, complete supporting evidence, and effective tax control processes provide a strong foundation for a structured audit. A Tax Compliance Management System (TCMS) can, additionally, help identify tax risks early and systematically monitor compliance with tax obligations (more on procedural documentation, the GoBD 2024, and TCMS can be found here: Procedural Documentation; KMLZ VAT Newsletter 19/2024).

After receiving an audit order, a targeted analysis of the affected tax types, periods, and risk areas is advisable.

Why is it sensible to obtain Professional Support during a Tax Audit?

Tax audits often concern complex tax questions and significant economic risks.

Professional support assists in the preparation of documents, the coordination of communication with the tax authorities, as well as in the legal assessment of disputed matters.

This helps identify tax risks at an early stage, manage audit findings proactively and effectively represent the company’s interests throughout the tax audit. The objective is to help assist in the achievement of an appropriate and favourable audit outcome.