Our French and American tax lawyers assist our clients in tax audits and the criminal proceedings that may follow.
Our experience in managing tax audits has taught us that they can be financially and psychologically devastating when you fail to accurately anticipate the spectrum of possibilities and defensive strategies. This situation is even more common in the sentiments between taxpayers and corporations or individuals as they are ill-equipped to face the mass and complexity of tax legislation in effect.
This frustration is all the more realistic since the taxpayer is not always well adjusted to such fiscal meddling. Simply look at the diversity of business executives that are dependent on the Ministry of Economy and Finance.
In these circumstances, consulting an experienced tax lawyer is often the most appropriate choice to best protect your interests. Taxes will mandate both a counselor and a vital interlocutor for a controlled taxpayer. Even though this process is strictly organized and regulated by the law, why deprive ourselves of this specialized opportunity?
As a prelude to any tax audit, it should be noted that the first job of any government is to manage its subsidiaries. This includes works that review overall critical statements in reference to specific services.
The administration may ask the taxpayer for any information or additional clarification on declarations they made.
It can also involve the right of communication: the potential for tax authorities to obtain third party information concerning a taxpayer. Banks and credit agencies are the largest providers of information to the IRS.
The union of these elements allows the administration to verify the accuracy of taxpayers' returns.
After the documentary audit, the administration decides whether to initiate a more elaborate and multifarious process. The administration has an opportunity to cast their sights on a company, referring to the compatibility check on individual taxpayers, in a review of the personal tax situation (ESFP).
CHECKING THE ACCOUNTS
Beginning of the Audit
This process, characterized by a thorough examination of accounting records, is put into action by first obtaining a verification notice. If this document indicates the years being audited, no text that is handled by the administration shall include or specify on which taxes the auditor intends to focus during their investigation.
The Court considers that a period of two consecutive working days must elapse between the receipt of notice and the commencement of operations. This period is granted to allow the taxpayer to prepare his defense and then, if desired, to seek the assistance of counsel of his choice. This is also mentioned in the audit opinion. At the same time, the administration must send the taxpayer the charter of rights and obligations of an audited taxpayer.
Compliance with these measures shall be subject to pain of nullity during the proceedings.
Guarantees Offered to the Audited Taxpayer
For the sake of oral and polemic debate, the auditor must ensure that the company is checked at least twice. The requirement for onsite enforcement operations run corollary to the principle that prohibits, without exception, the auditor from specific dealings with the accounting records of the company subject to verification.
We must also mention the principle enunciated by Article L 51 of the LPF: "When the accounting audit for a period determined in respect to a tax or charge is complete ... the administration cannot conduct a new audit of those records in relation to the same taxes or charges for the same period of time.”
Duration of the Verification Procedure
The duration of the audit cannot be longer than three months for companies with net sales that do not exceed €763,000, including industrial and commercial enterprises whose main business activity is selling goods. This limit is set at €230,000 for service providers or persons not engaged in commercial activity. In other cases, the audit procedure has no set time limit.
End Date of an Audit
The date of the last direct intervention which ends the involvement in checking accounts. This date is often printed on the notification of adjustments.
Irregularities in the procedure involves the release of charges resulting from the audit. This rule generally applies when the administration has followed the adversarial process.
All statutory procedures for imposing nullity on the proceedings, and any taxation thereunder, shall be subject to the discovery of undeclared taxes in dispute throughout the irregular procedure.
Examples of procedural irregularity include the following: the administration fails to provide the audited taxpayer with the Charter of Rights and Obligations of Audited Taxpayers, a failure to observe the rules on the auditor’s treatment of sensitive documents.
EXAMINATION OF THE PERSONAL TAX SITUATION (ESFP)
As part of this review, the administration verifies the consistency between the declared income and the actual situation of assets, cash, and lifestyle elements.
Beginning of the Audit
In order to verify the veracity of the taxpayers accounting results, the administration is required to inform the taxpayer via an audit opinion that states, under pain of nullity in the proceedings, that the taxpayer has the option to seek assistance from the counsel of their choice.
Duration of the Verification Procedure
If the procedure is in principle limited to one year (Article L.12 of the LPF); the administration is not required to notify the taxpayer of the audit opinion.
Structure of the Audit Process
Most of the time, an examination of the personal tax situation (ESFP) requires the participation of the local tax administration.
The administration sends a request for tax justifications to the taxpayer, suggesting that they have gathered evidence to establish that the taxpayer may have more income than was reported.
Discovering bank loans out of proportion with the reported revenues often encourages the administration to implement the procedure and mandate a justification of resources. In practice, the discovery of credits twice as large as the reported annual income for a given year is a qualifying criterion (rule of "double," confirmed by the EC in 1990).
Whenever the tax authority finds resources in excess of declared income, the taxpayer must prove:
- The existence of non-taxable aspects of the resources in question,
- That the assets found were transferred through the accounts in question and reveal the assets as agents or interlocutors of a third party.
If the taxpayer fails to justify the non-taxable resources targeted by the administration, the respective assets will be treated as unreported income and taxed immediately.
End Date of an Audit
The ESFP is formally declared complete from the date of notification to the taxpayer of the findings and consequences of the audit.
End of the Investigation
Any irregularities found during the ESFP leads, in principle, to the consequent release and application of additional taxes. The option for investigation is decided by the administration.
Adversary Reorganization Proceedings
If the administration initiates a tax audit, it must follow a detailed procedure; the most common of which involves contradictory reorganization. The monitoring of this procedure requires the compliance of directors with various procedural safeguards, most of which have already been cited (delivery of the audited taxpayer's rights, an oral and polemic debate within the company premises, presentation of the administration’s rationale for the audit, a demand for justification of taxpayers claims, etc.)…
This is initiated by a notification addressed to the taxpayer that allows taxpayers to submit comments in defense of their claims. They must also clarify under penalty of nullity the taxpayer’s right to consult legal assistance.
At this point, the taxpayer has 30 days to submit comments, which the administration is not obliged to accept. In this case, the taxpayer then has the power to appeal to the Provincial Board of Direct Taxes and Sales Tax, or the Conciliation Board, if the recovered taxes are under the jurisdiction of one of these entities.
After this final step, the reassessments of the tax may be considered. This action renders the taxpayer liable for all taxes.
The Process of Automatic Taxation
If the taxpayer fails to meet its obligations in reporting taxes, the administration may implement a procedure for imposing authority. The taxpayer then proves that a valid statement had been delivered.
This procedure is applicable if the taxpayer fails to produce a justification for tax reporting as requested by the tax administration.
It is important to note that before pursuing this procedure which inevitably penalizes the taxpayer, the administration is required to send a formal notice to the taxpayer calling for the restructuring of their situation within 30 days.
The implementation of this procedure reduces the procedural safeguards available to the taxpayer. As has already been stated, any procedural irregularities will not inflict serious consequences if they have failed to help discover any breach in the veracity of tax reporting as required of the taxpayer. Additionally, the taxpayer may be forbidden from commenting within 30 of the notification of recovery.
Throughout this process, the administration assesses, as accurately as possible, tax bases without opening a dialogue between the parties concerned.
In any event, the taxpayer must allow the auditor to investigate the matter, provided that the documents requested are produced, and if necessary lead a review meeting before the audit has been officially closed.
Now more than ever, the role of a tax lawyer is essential in their assistance and advice offered to an audited taxpayer. They are also invaluable in developing an effective response strategy should the procedure call for legal action or trial.
Fight against despondency... to do this, you must seek the assistance of a French Law Firm based in Paris.