I am a business facing a tax audit: why me?

Every year, the tax authorities carry out several tens of thousands of business audits. In the vast majority of cases, a business is targeted for a tax audit on the basis of objective criteria. As a business, however, it is difficult to understand why it was chosen rather than another.

The choice of the businesses audited is not a matter of chance. Given the amounts recovered each year, it is clear that the tax authorities’ strategy is a well-oiled machine. It appears that certain signs in particular will alert them and convince them that a tax audit is necessary. When a business finds itself in one of these situations, it is at risk of undergoing a tax audit.

Dealings with foreign countries

At both the commercial and financial level, dealings with foreign countries are among the factors that may attract the attention of the tax authorities. Tax havens are a source of temptation, and wherever the tax regime is advantageous, questions will arise as to how the business operates. The setting of purchase/sale prices is often one of the issues raised, since prices may be the basis of organised tax evasion.

An accounting audit (vérification de comptabilité) is often chosen for this type of situation. The tax officer may exercise the right of disclosure (droit de communication) to identify whether any tax irregularities exist.

Ownership of foreign companies

Where companies are owned abroad or subsidiaries have been set up outside France, the declarations of the income generated are closely scrutinised. It is relatively common for taxpayers to forget or seek to conceal foreign income.

They sometimes forget that a foreign company that makes profits from operations in France is required to declare its income in France. This situation is frequent, so resorting to a tax audit makes it possible to recover a large amount of sums that were not declared in the first place (VAT, corporate income tax, territorial economic contribution (CET)…).

A business with sensitive activities

Construction, catering and activities such as buying and selling precious metals are somewhat more affected than average by concealed activity. The tax authorities are therefore more vigilant with regard to these business sectors. Tax audits are organised to check that all employees are declared and whether money laundering is taking place in these businesses. In the catering sector, the problem is above all the handling of large sums of cash every day. Professionals are therefore sometimes tempted not to declare everything.

A stock turnover rate that is too low

In the annual return, a low stock turnover rate may suggest that the business is understating figures in order to reduce the amount of its tax. Such an observation may therefore lead to a tax audit to check the actual situation at the close of the financial year.

The accounts will then be scrutinised and the stock may be checked at the business’s premises. If reality has been distorted in order to file a false return, a tax reassessment will quickly follow. It is therefore advisable to file a sincere and accurate return to avoid this type of outcome.

Staff productivity

When the staff productivity ratio is low, turnover per employee is low. The tax authorities will wonder whether this reflects reality or whether this feature expresses an intention to conceal part of the revenue. Omissions or errors in revenue may also be the cause of such figures in the return.

Declaring significant losses

If a business declares large losses but has no plan to turn the situation around, the tax authorities will become suspicious. The aim is to check whether the losses are real or inflated, or whether certain resources are being concealed to avoid paying tax. A request for clarification or justification can help establish what solutions the business is considering in order to put an end to the losses and become profitable.

A discrepancy between turnover and the VAT declared

Since two separate returns are filed for turnover and for VAT, the data sometimes differ or are even inconsistent. In this situation, a tax audit will not be long in coming. A desk audit (contrôle sur pièces) may be decided, unless a full accounting audit is proposed in order to go through all the accounting books and identify every anomaly. An adjustment may then be made, taking into account a new basis for calculating the tax.

A previous tax audit

A few years after the first tax audit, it is common for a second one to be scheduled. Its purpose is to make sure that the taxpayer has properly understood the tax rules and is applying them. A desk audit may then be organised. If new anomalies are identified, a new accounting audit followed by a tax reassessment may be organised. It is therefore advisable to comply strictly with each business’s obligations towards the tax authorities in order to put an end to this type of procedure.

Business restructuring

While this is a common procedure, the tax authorities will check whether mergers or contributions of assets have been carried out in accordance with the legislation in force. Where they are all carried out tax-free, a tax audit will ensure that no error has been made, whether deliberately or inadvertently.

Fund transfers between loss-making and profit-making companies

While it is tempting to proceed in this way in order to balance the accounts and avoid paying substantial taxes, as a general rule one return per company is required. The tax audit is therefore justified, since these transfers must correspond to a situation provided for by the French General Tax Code (Code général des impôts, CGI). If this is not the case, a tax adjustment may follow.

Our tax law firm can assist you.