If entrepreneurs do not want to run the risk of additional estimates during tax audits, they must be able to present procedural documentation – often immediately after the audit order.

I. What is procedural documentation and who must keep it?

Procedural documentation is intended to present the structure as well as the organisational processes in a company that are related to accounting in a stringent and comprehensible manner. In addition to general structures such as document storage and financial accounting, this also includes all documents relevant to the individual business processes. This can also include (electronic) correspondence as well as payroll and time recording processes. The procedural documentation extends the general requirements for accounting, which result from the original accounting obligation, from the German Commercial Code as well as the extended accounting obligation of the German Fiscal Code, the principles for the proper keeping and storage of books, records and documents in electronic form as well as for data access (GoBD), by a further issue. In this respect, there is an obligation for companies to prepare and maintain procedural documentation that generate profit income according to §§ 5, 4 para. 1 EStG. In this respect, there are no exceptions, so that even small businesses must maintain procedural documentation.

II Structure and content of procedural documentation

The procedural documentation must be comprehensible and complete for an expert third party, in particular for the auditors of the tax authorities. The documentation of all relevant processes should be done in such a clear way that the expert third party can get an overview within a short time. But how exactly should procedural documentation be structured in order to do justice to this? The concrete design depends, of course, on the respective company and its business processes. However, the Federal Ministry of Finance assumes a general structure described as follows:

1. general description

Within the framework of the general description, the organisation of the company shall be presented. In particular, staff responsibilities and the operational environment should be explained in more detail. Furthermore, the processes relevant under tax law are to be described. The business processes carried out should be clearly presented from start to finish, i.e. from order processing to accounting and the associated payment transactions to the archiving of documents.

2. user documentation

The user documentation describes the software used. For the sake of completeness, the operating instructions for the respective software should also be included.

3. technical system documentation

The entire IT use in the company should also be presented. In addition to hardware and application service providers, this also includes data backup and data protection.

4. operating documentation

Finally, proper procedural documentation also includes a description of the internal control system. This is to guarantee compliance with the procedural instructions and lead to complete operational documentation. Furthermore, the procedural documentation must always correspond to the current procedure used in practice. Changes must be historically traceable; in particular, it must be recognisable which programme version has been used for which period.

III. Consequences of incomplete procedural documentation

If only incomplete procedural documentation or, in the worst case, no procedural documentation at all is submitted to the tax authorities, there is a formal deficiency with material weight and there is a possibility that the auditor will reject the entire accounting. As a consequence, additional assessments of up to 10 percent of the annual turnover on the taxable profit can be threatened. Such costs are unnecessary and avoidable. In order to safeguard themselves in advance, companies should seek professional help if they have doubts about completeness. Our tax advisors will be happy to advise you in detail on the subject and provide you with customised solutions for your company.

If you are interested, please contact us by e-mail, via the form on our website or by telephone.

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