When a person discovers that he has inherited account, the first step is for a person to discover whether it has been correctly reported. If not, the heir has to start considering criminal tax law implications and tax obligations.
What kind of tax law obligations are involved for the heir in the acquisition of a foreign unreported taxable income account?
Answer: The competent fiscal authority in charge of collecting inheritance tax must be notified in writing of any inheritance within three months of the heir becoming aware of it. This notice has to contain all the information required to calculate the possible inheritance tax, such information is:
- Name and surname, profession and residence of the testator and the heir.
- Day and place of death of the testator.
- Subject and value of the asset inherited.
- How it was inherited such as intestate succession, legacy or endowment.
- Personal relationship between testator and heir such as family relationship, affinity or employment relationship.
- Former benefits granted by the testator to the heir listed by kind, value and date of the individual benefits.
The notice is to inform the fiscal authority of the inheritance. If the fiscal authority becomes aware of the inheritance, it may request that a formal inheritance tax return be submitted to investigate the matter.
It should be noted that German banks, German branch offices of foreign banks and dependant foreign branch offices of German banks are obliged to notify the fiscal authority of the death of an account holder within one month of becoming aware of it. Thus, even if notice was not given by the heir, the fiscal authority can potentially become aware of the inheritance and of the account.
What are the consequences if you fail to notify the fiscal authority within the deadline?
Answer: A possible inheritance tax claim by the fiscal authority generally arises upon the testator's death. Evaded inheritance taxes bear an interest rate of 0.5% per month (i.e. 6% per annum). The inheritance tax is treated as evaded upon a person being aware of the inheritance and intentionally failing to notify in order to avoid inheritance tax payments. Interest starts to accrue from that point on at the latest. Therefore, in your own interest, notifying of the inheritance should not be deferred unnecessarily.
What happens if the unreported taxable income account is continued in the same way as maintained by the testator?
Answer: If taxable profits such as interest or dividends are gained through the unreported taxable income account and if these are intentionally not declared in the annual tax return, this is regarded as own intentional tax evasion on behalf of the heir. Depending on the amount of the evaded taxes, this could potentially lead to substantial fines and even prison sentences.
The fiscal authority's investigation methods for foreign accounts should not be underestimated. The EU member states and other important neighbouring states, as for example Switzerland, have already agreed on an automated data exchange for interest. This exchange is practised between Germany and the majority of the EU member states already and is expected to be implemented for the rest of the states (e.g. Switzerland, Austria and Luxembourg) in 2017. It can be assumed that the automated data exchange will in the near future extend towards all typical types of investment income (including but not limited to dividends and sales proceeds).
How can I legalise the inherited unreported taxable income account?
Answer: As a "golden bridge to tax honesty", the legislature offers the taxpayer possibility of voluntary self-disclosure to avoid penalty fines. In case of a successful voluntary self-disclosure, the taxpayer will not be prosecuted for the respective tax offences if he or she hands in the incorrect information for any and all taxes of a type which are not subject to a statute of limitations at a later point in time. This enables the fiscal authority to collect the taxes retroactively. As a rule, any incorrect information given during the last ten years have to be rectified. Although inheritance tax and income tax are regarded as two individual tax types, the voluntary self-disclosure should include both types of tax.
Is the heir subject to a disclosure obligation also for taxes evaded by the testator?
Answer: If the heir becomes aware both of the unreported taxable income account and the fact that tax has been evaded on this account when it is inherited, as is the usual case, he is generally obliged to rectify the incorrect tax returns handed in by the testator in the past. If the heir fails to comply with his obligation to rectify, he is committing tax evasion. Particularly if the heir evades taxes on investment income gained through such respective account after the effective date (for example because he fails to declare gained interest or dividends in his own tax return), this can lead to a dramatic increase in the tax amount treated as evaded.
It depends on the particular facts as for how many years the heir has to rectify and return the tax amounts evaded by the testator in order to avoid himself becoming criminally liable in a tax offence. The fiscal authorities apparently take a very strict approach in this respect and in some cases even extend the statue of limitation for tax evasion past the usual ten year period. In this case, advice from an experienced lawyer or tax adviser should be sought so that the testator's tax returns can be rectified and a person can be advised of his rights.
The taxes evaded by the testator are liabilities of the estate. As they reduce the estate, it is possible that payment of the taxes evaded by the testator can result in a reduction in the inheritance tax burden.
What costs are incurred in case of a successful voluntary self-disclosure?
Answer: A successful voluntary self-disclosure is subject to the condition that (i) the evaded taxes, (ii) the interest on the evaded taxes and (iii) if applicable a penalty surcharge (the amount of which is dependent on the amount of evaded taxes) are paid upon request of the fiscal authority. The respective amount of the penalty surcharge is dependent on the amount of evaded taxes. From 2015 onwards, a graded penalty surcharge shall be valid for evaded amounts of EUR 25,000 p.a. or more. The penalty surcharge is 10% for accrued taxes from EUR 25,000 to EUR 100,000 p.a., 15% for accrued taxes from EUR 100,000 to EUR 1 million p.a., and even 20% for accrued taxes of EUR 1 million p.a. or more. Furthermore you will have to allow for fees charged for advice given by a lawyer or tax adviser in the process of drafting the voluntary self-disclosure.
Please note that a successful voluntary self-disclosure depends on a number of conditions and that it is recommended in any case to draw on the advice of a lawyer or tax adviser who specialises in criminal tax law.