Heirs must tolerate external audit according to the verdict of the Hessian Finance Court
Even if the owner of the business has already passed away and the business is not continued by their heirs, the responsible tax office can still order a business audit for past tax assessment periods. This was decided by the Finance Court of Hesse in its judgment on May 10, 2023 (Case No.: 8 K 816/20).
When the business owner has passed away, their heirs assume their legal succession. This means that the tax obligations of the deceased are transferred to them. According to the decision of the Hessian Finance Court in Kassel, this includes that they must tolerate a business audit even if they do not continue the business of the deceased, as stated by the commercial law firm MTR Legal Attorneys, which provides comprehensive advice to its clients in both tax law and inheritance law, offering interdisciplinary legal advice under one roof.
Heirs do not continue the business
In the underlying procedure before the Hessian Finance Court, an external audit was ordered for the construction business of the father for the past tax assessment periods from 2014 to 2016. The father had passed away in 2016 and his two sons had become the heirs. In 2019, the responsible tax office sent the audit order for the construction company of the deceased father regarding income tax, value-added tax, and business tax to the heirs. The sons had unsuccessfully lodged an objection against the audit order.
The case eventually reached the Hessian Finance Court. Here, the sons argued that a business audit would only be permissible for taxpayers who maintain a commercial operation. However, this had only been the case with their father. After his death, the sons did not continue the business. Instead, the business was dissolved and terminated with the help of the tax advisor. Since the sole proprietorship was no longer maintained, an external audit was not permissible, the sons argued. They further explained that they were not familiar with their father’s business. If errors or deficiencies were discovered during the business audit, they would not be able to clarify them. Only their deceased father could have provided such clarification and possibly refute the tax office’s claims with evidence. Since only the business owner could provide such information about business activities, a business audit after the death of the business owner was not permissible.
Hessian Finance Court dismisses the lawsuit
The FG Hessen did not accept this reasoning. The 8th Senate of the Finance Court dismissed the lawsuit. It explained that according to § 193 Abs. 1 of the Fiscal Code (AO), an external audit is permissible for taxpayers who maintain a business. This regulation is necessary for reasons of equality, in order to be able to verify the accuracy of the accounting and thus the correctness of the taxes calculated for business owners. Naturally, past tax assessment periods must be reviewed.
The regulation is to be understood in such a way that the business should be audited in the years in which it existed. A later cessation of the business is not significant in this context, the Senate made clear. Because in the case of inheritance, all rights and obligations are transferred to the heirs. Therefore, an external audit must also be tolerated by the heirs, even if they have never run the business themselves.
Non-admission complaint to the federal finance court
Regarding the admissibility of a business audit, it should not be considered whether the heirs might have difficulties providing information or submitting documents, further stated the Hessian Finance Court. Such circumstances would only become relevant at a later stage of tax proceedings in terms of evidence, the court said.
A non-admission complaint has been filed against the judgment at the Federal Finance Court (BFH) (Case No. X B 73/23).
Regardless of the decision of the Federal Finance Court, it is evident that heirs should prepare for a business audit and obtain the necessary overview of the business’s tax matters. This can be time-consuming, but it can potentially avoid additional assessments by the tax office and high back payments.
MTR Legal Attorneys is happy to provide advice on business audits and other tax law questions.
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