Decline in Enterprise Tax Audit Numbers Observed
In recent years, Germany has witnessed a significant decline in tax audits on companies, with the number of audits dropping by nearly 60% over the past decade. This transformation, driven by advances in technology and automation, has led to a shift from manual audits to digitally enabled, targeted approaches.
The decline in audits has raised concerns among some, particularly Anne Brorhilker, a former public prosecutor and the managing director of the Initiative Finanzwende. She argues that the federal government could step in by providing federal business inspectors if the states are unable to hire enough staff. Brorhilker believes that strengthening the tax authorities is essential to upholding the rule of law and democracy.
The decrease in audits may potentially lead to a decrease in detected tax non-compliance, risking lower tax revenues for the government. However, digital tax monitoring and reporting may compensate or improve tax collection efficiency by focusing on higher-risk areas identified through data analytics rather than random or blanket audits.
For financial regulation, this means a shift towards stronger data governance, transparency, and real-time fiscal oversight rather than periodic manual checks. Increased reliance on automation and AI requires companies to ensure data quality and governance to avoid compliance risks.
The states cite staff shortages as one reason for the decrease in tax audits. Despite the significant revenue generation potential of each business inspector—with an average of one million euros in revenue per year, many times their cost to their respective federal state—the number of tax audits of companies has plummeted. The states currently employ 12,359 business inspectors, which is almost 10% less than in 2015.
Small businesses can expect an audit on average every 150 years, while the audit rate for large and medium-sized companies is 296 and 183 out of 1,000 respectively. Critics have long called for the state to hire more business inspectors, but the opposite is happening.
The federal finance minister, Lars Klingbeil, needs more than 170 billion euros in his financial planning for the years 2027 to 2029 alone. The development of decreasing tax audits is paradoxical because each inspector generates significant revenue. The state is reportedly generating less revenue through tax audits compared to the previous decades.
Brorhilker's organization, the Initiative Finanzwende, is committed to the fight against financial crime. They suggest that the federal government could intervene to address staff shortages and ensure adequate tax enforcement. Audit cases are becoming increasingly complex and time-consuming, making the need for skilled inspectors more pressing.
As the trend towards digital tax administration continues, it remains to be seen how this will impact tax revenue and compliance in Germany. Without additional specific German government data, it is difficult to quantify exact effects on tax revenue, but the trend reflects a global move towards digital tax administration.
- The decline in tax audits, as a result of technological advancements, may necessitate an update in the community policy regarding tax enforcement, specifically employing more business inspectors to maintain revenue and uphold the rule of law.
- The reduction in manual audits, coupled with the growing importance of digital tax monitoring, highlights the need for improved employment policies within the tax authorities, ensuring skilled inspectors for complex cases and adequate staffing to maintain steady tax revenue.
