Since German banks are not required by law - as they are for example in the US - to report investment income directly to the tax authorities, German tax offices must rely entirely on the taxpayers' voluntary disclosure on their tax return.  The extent of unreported income, and the related loss of tax revenue, were deemed to be substantial.

Under the amnesty program, relatively favourable tax rates were applied to the income voluntarily declared by German taxpayers up to 31 March 2005.  With the passing of this deadline, as of 1 April 2005 new procedures allowing German tax authorities limited access to information regarding taxpayers' bank accounts, both checking and investment accounts, are now in place.

No fishing allowed

However, before you get too worried about the taxman snooping around your bank account, it's important to note that the tax authorities must have a valid reason to proceed with a request for information - no 'fishing expeditions' are allowed.

Although a presumption of criminal tax evasion doesn't have to be present, the tax authorities must have reasonable grounds to suspect substantial underreporting or tax avoidance. In addition, they must be able to document that they have been unsuccessful in obtaining the information directly from the taxpayer, and that future efforts to bring the taxpayer into compliance would be futile. 

Additionally, the taxpayer must be informed of the inquiry in advance, unless such notification would endanger the inquiry itself.

A two-step process

In the first step, the local tax office directs its inquiry to the Federal Finance Agency (Bundesamt für Finanzen).  Since this agency maintains a database of all bank accounts, it can run the search independently of the financial institutions themselves.  The following data will be provided:

• the taxpayer's cash and securities account numbers
• the opening and closing dates of these accounts
• the account holder's and his representatives' names and dates of birth
• the names and addresses of other signatories.

At this stage, no information about the balances and activity in the accounts will be made available.

He or she must also be informed of the possibility of a direct inquiry at his bank, unless, again, this could jeopardise the inquiry - in which case the notification would occur after the fact. 

If the data gathered at this time is sufficient to allow the tax office to reconcile the inconsistencies it had uncovered in the information submitted by the taxpayer, the process stops here.

If, however, the data still appears incomplete and the taxpayer is not cooperating, a second inquiry will be allowed.

In this second step, the tax office addresses its request directly to the taxpayer's bank and will obtain information about the balance and the activities in the accounts.

Checking bank accounts for non-tax related purposes may also be possible:  If compliance with a non-tax law that refers to the German Income Tax Act would require it, other government agencies may ask German tax authorities to intervene to secure the information.

Honest taxpayers need not fear

The implications of the new procedures have been wildly exaggerated in the media, who dramatically proclaimed the end of bank secrecy in Germany.  A certain level of 'bank secrecy' exists in Germany, as long as no direct reporting from banks to tax authorities occurs.

However it's important to remember that it was already possible for the tax authorities to seek information from taxpayers' financial institutions, and that the banks did not have the right to refuse to comply.  What is new is the possibility for the tax authorities to uncover bank accounts not reported by a taxpayer through an inquiry at the Federal Finance Agency.

As always, the best advice when dealing with the tax authorities is: be honest.

Katrin Köhler is the Senior Manager, International Assignment Services at Deloitte Tax, Düsseldorf. Contact her at kkoehler@deloitte.de or +49 211 8772.2641.