Sham invoices, cover invoices, straw man invoices and co

Many entrepreneurs are confronted at some point in their business life with the accusation by the tax office that they have committed tax evasion by issuing so-called fictitious invoices.

The core of the accusation with which restaurant operators, hairdressing salon owners, building contractors and the like are confronted is often the assumption of the tax authorities that a service was faked by an allegedly performing entrepreneur to an invoice recipient and that a service was not actually provided.

Further allegations focus on the suspicion that the entrepreneur paid his employees illegally and then had another company write fictitious invoices in order to claim operating expenses.

What you need to know and how we can help you

Fictitious invoices are invoices that simulate or conceal a specific business transaction.

They are used to manipulate a company’s turnover or costs in order to save or evade taxes. In particular, they influence turnover tax, income tax, trade tax and corporation tax.

Fictitious invoices can be used by both invoice issuers and invoice recipients to optimize their tax situation.

Bogus invoices can take various forms. The most common types include

• Genuine fictitious invoices: A company issues an invoice to another company without an exchange of services having taken place, so that the invoice recipient can wrongly claim a deduction for operating expenses and input tax.

• Circumventing transactions: An invoice is issued to conceal another transaction, e.g. the payment of bribes.

• Hidden transactions: There is an exchange of services between two persons, but for a different purpose than that stated in the invoice, e.g. to achieve more favorable taxation.

• Covering invoices: A classic example of this is when an entrepreneur pays his employees’ wages in the black and is therefore unable to claim any operating expenses. To compensate for this disadvantage, he commissions another company to issue invoices for fictitious services. The invoice recipient can then deduct the fictitious invoice as a business expense and also claim the input tax deduction.

• Straw man invoices: An invoice is issued that specifies a false invoice issuer or recipient. The false invoice issuer or recipient merely serves as a straw man for the company actually providing the service.

• Contracts with close relatives: For example, the entrepreneur employs his spouse, who allegedly does the bookkeeping, or the self-employed person rents premises from relatives and claims these as business expenses. In these cases, the so-called arm’s length comparison must be used to check whether an employment or rental relationship exists at all.

• Invoices for favors: The invoice issued contains an unperformed or excessive service, e.g. to provide a business partner with an advantage or to help him.

• Falsified invoices: An invoice is issued that contains a forged signature, a forged date, a forged invoice number or other false information, e.g. to justify or avoid an earlier or later payment.

§ Section 42 (2) AO highlights the problem of so-called sham invoices:

“Sham transactions and sham acts are irrelevant for taxation purposes. If another legal transaction is concealed by a sham transaction, the concealed legal transaction is decisive for taxation purposes.“

If the tax office or the tax investigation therefore identifies a sham invoice, it is invalid for tax purposes. Consequently, no business expenses and input tax deductions that were claimed on the basis of a sham invoice may be taken into account.

What effect does the discovery of a sham invoice have?

Being accused of using or receiving bogus invoices poses a serious threat to your tax and criminal integrity.

The tax office can correct the tax assessment and assert considerable additional claims with interest and late payment penalties.

There is also a risk of prosecution for tax evasion (Section 370 AO) or aiding and abetting this (Section 370 AO, Section 27 I StGB). The penalties can vary from fines to imprisonment depending on the severity and scope of the offense. In addition, the reputation of the company or person who received and issued the fictitious invoices can be permanently damaged.

How can we help you?

If the tax office or tax investigators discover a potential bogus invoice, you should not panic but seek professional help.

Our law firm Mügge, Dr. Pitschel & Partner specializes in tax law and can therefore help you in the best possible way to defend yourself against the accusation of bogus invoicing.

We check the invoices and the underlying contracts to verify the legality of the service provision.

We represent you vis-à-vis the tax office and the criminal authorities and stand up for your rights.

We also advise you on possible voluntary declarations in order to achieve a mitigation or exemption from punishment. We will support you with our many years of experience and expertise to offer you the best possible solution.

If you have any further questions or are a defendant in criminal proceedings or tax proceedings (criminal tax proceedings), please do not hesitate to contact us.