The French tax system relies on a declarative system, based on the presumption that the taxpayer declares what he owes truthfully. In return, the IRS is responsible for ensuring the accuracy of these written statements. If omissions, inaccuracies or deficiencies are revealed during an inspection or audit, the officials in charge of public finances will carry out corrections according to a process laid out by legislators. If the tax authorities demonstrate excessive use of power, audited taxpayers are protected by and benefit from the rights and guarantees codified in the General Tax Code and the convention for tax procedures.
Three types of audits
The most common audit is also the most practical and expedient, known as a “tax audit on documentary evidence”, which occurs without advance notice. The IRS will make occasional consistency checks based on tax returns and other pieces of information that the IRS and auditors possess. If an audit is mainly based upon professional and income declarations, tax authorities might also review what a taxpayer has declared for the French solidarity wealth tax (ISF) as well as his or her will.
The most well-known type of audit is the account audit. The process involves cross-checking the actual revenue and expenses of a business with their returns (mainly looking at company taxes and taxes on revenue, VAT, etc. The audit might occur onsite on the company’s premises, although it is possible, if the company takes the initiative, to request for the audit to take place at the Office of the Public Account or the Office of the Inspector, both of which are generally exceptions that require explicit authorization.
Finally, the last, least known audit is the review of personal tax situations (ESFP). Those who could be subjected to this inquisitorial audit include individuals and/or business leaders, possibly in addition to an accounting audit.
The objective sought by the tax authorities is to detect unreported income by analyzing the movements of bank accounts opened by the taxpayer in France and abroad.
What causes a tax audit?
The reasons that the IRS audits one business and not another are numerous and varied. However, we can identify certain patterns that occur frequently:
Tax audits on documentary evidence
Sometimes, there are no specific reasons. These spot checks are triggered mainly to correct minor clerical errors or omissions on VAT or income tax returns for a given year. However, although this concerns only a minority of citizens, reviewing and comparing a will and solidarity wealth tax declaration (ISF) could result in a reevaluation of the fees you pay with regards to ISF or registration.
These can be caused by the most banal issues. According to statistical studies conducted by the Bercy Initiative and regional and departmental boards, Inspectors of Public Finance are encouraged to review certain sectors more frequently (construction companies and their subcontractors, internet-based companies, transport companies, etc.).
There are a couple of actions that tend to set off alarms, including reports of modest systematic turnover each year or of repeated negligence, habits of filing important documents late, and submissions of incomplete statements. These “encourage” the tax authorities to proceed with an account audit.
Apart from these “classic” cases, the grounds for account audits are varied and do not follow any rational standard. These audits can be triggered by information gathered by an inspector during an account audit of a subcontractor, supplier, customer, competitor, etc.
Audits are also likely to be set after a URSSAF audit, which highlights social contribution deductions, the existence of employees not in the books (paid “under the table”), and more.
However, it is also entirely possible for a company to be subjected to an account audit simply because it has not been reviewed in the last 20 years. The IRS may consider it equitable and just that all taxpayers as well as companies be subject to review at least once.
Examinations of personal tax situations (ESFP)
Given the nature of this audit, the entire procedure is laid out by legislative and administrative doctrine. Tax authorities encourage inspectors to go about an ESFP audit in a very precise way, especially when there are high stakes for the State Treasury.
Therefore, tax audit personnel tend to target cases in which the grounds for an audit are serious, where a taxpayer deliberately and grossly underestimates his statements. The IRS can access and collect a broad range of atypical and diverse information. They investigate anything from blatant discrepancies between the apparent "lifestyle" and the reported income, to information from criminal judicial proceedings, to information acquired via Tracfin (a service of the French Ministry of Finances designed to combat money laundering). The General Directorate of Public Finance believes that to understand the reality of a fraud fully, an in-depth analysis of the movements of bank accounts opened by in France or abroad is crucial.
To answer the question that unavoidably manifests itself in conversations about audits, it is true that some audits are set off based on external recommendations or whistleblowing.
However, these sorts of audits make up less than 10% of those conducted yearly. Although thousands of anonymous letters arrive each year, directly to Bercy or the Center for Public Finances, more than 2/3 are thrown out almost immediately because of their total lack of credibility. For the remaining 1/3, the information provided by these anonymous sources are corroborated discretely and carefully by expert investigators, specifically installed in the National Directorate of Tax Investigations (DNEF) and research teams, with regional or departmental jurisdiction.
After throwing out most of these files, some things here and there do result in an audit if tax authorities are able to confirm the veracity of these anonymous tips.
As a result, PICOVSCHI Lawyers are always very cautious when opening a client’s files. We take the necessary time to review the case before us, and our tax attorneys are ready to defend the interests of any company or individual confronted by a treasury representative.
Furthermore, when the client becomes acclimated to the climate of transparency and trust on which we here at Picovschi Lawyers pride ourselves, our attorneys who specialize in tax audits will make every effort to address the auditor’s claims. If necessary, they will be involved right from the start in any audit—documentary, account, or ESFP. They are then prepared to file a counter response to the proposed correction. If it turns out that the tax administration has overstepped its authority or obviously exaggerated adjustments, our tax lawyers will shift into high gear to support their client in exploring the best recourses available under the charter of rights and responsibilities of audited taxpayers, as laid out by the legislature.
Finally, if the IRS persists in acting unfairly, we will continue fighting through litigation, going as high as the Administrative Court of Appeal if necessary.