Whether it is caused by an error, an oversight or deliberate fraud, an in-depth examination of personal tax situation (examen contradictoire de la situation fiscale personnelle, ESFP) is a meticulous investigation carried out by officials of the French Public Finances Directorate General (DGFIP) in order, in most cases, to check the consistency between an individual’s assets, declared income and lifestyle.

1-           Definition of the In-Depth Examination of Personal Tax Situation (ESFP)

If the tax authorities identify anomalies in an individual’s income tax returns, they carry out an in-depth review of the taxpayer’s situation at the taxpayer’s premises and/or in the tax office. The official in charge of the case will thus gather all the documents required for the tax examination, bearing in mind that the tax authorities already hold certain documents even before the audit. This is the desk-based tax examination (contrôle sur pièces). If, in studying this information, the official finds inconsistencies or irregularities, it will then be necessary to clarify matters. This is why an in-depth examination of personal tax situation (ESFP) is initiated.

2-           How the In-Depth Examination of Personal Tax Situation (ESFP) Unfolds

a-           Receipt of a Letter

If you are concerned, you will therefore receive a letter informing you that the audit has been initiated and asking you to provide various documents at the first meeting with the tax authorities (generally your bank statements). Various other letters may then be received: a letter inviting you to complete and clarify details of your family situation, your income, your place of residence, etc. Each of these letters will list the documents to be provided to the tax authorities as well as the clarifications to be given. These documents should be returned as quickly as possible in order to demonstrate your good cooperation with the tax officials, generally within 60 days. If you need help, do not hesitate to contact a tax lawyer, who will be able to advise you on the steps to take and inform you about the various documents to be provided.

b-          Analysis of Supporting Documents

These documents will then be deciphered, examined in depth and analysed by the tax officials in charge of your case. All your bank transactions will be scrutinised meticulously. Your current accounts, financial accounts of various kinds, mixed accounts, accounts held with stock market institutions and your accounts located abroad will be analysed to verify that no error or omission has occurred in your declarations.

c-           Oral and Adversarial Discussion

Then, after and very often even during this review, the oral and adversarial discussion takes place. The tax official will list any errors and omissions identified. During this discussion, you may be assisted by a tax lawyer to advise you and give you the benefit of their expertise, both in terms of technical tax skills and in terms of the strategy to adopt during this exchange.

d-          Outcome

Following this, two scenarios arise. If the review of your case reveals no error or omission, the tax audit will end there and you will receive a notice of no reassessment.

If doubts remain and the officials do not obtain plausible explanations concerning the acquisition of certain sums of money, or in the event of a refusal to cooperate, a second procedure will then be initiated. This is the written procedure.

e-           The Written Procedure

The written procedure comes into play when the officials do not find your explanations sufficiently valid or if they consider that you are showing unwillingness to cooperate. The tax authorities will decide to send you a request for justification, no. 2172 SD. This request will concern the year or years covered by your tax examination. You will need to show good will and, in principle, reply within 60 days. This procedure applies where the sums are equivalent to twice the income previously declared or exceed it by at least €150,000.

If your explanations/justifications still do not satisfy the tax official and discrepancies remain, the tax official will initiate a second written procedure, to be completed within 30 days, concerning the sums that remain unjustified.

Once this period has expired, the tax authorities will reassess your tax by taking into account all the unexplained sums. A new tax base will then be calculated, and the tax will be computed on this new amount. You will most likely have sums to pay following this procedure, as well as penalties and late-payment interest.

3-           Available Remedies

Following a proposed reassessment (proposition de rectification), you will have the opportunity to justify the sums concerned by grey areas and to explain yourself. The help of a tax lawyer may be useful in finding the right arguments and the right attitude to adopt in order to prove your good faith, or at the very least your willingness to find common ground with the tax authorities.

The tax official will study this challenge carefully in order to understand how your explanations may alter or cancel the proposed reassessment. If the official considers that they do not, the proposal will remain valid. Nevertheless, you will receive a response from the tax authorities, whether or not your explanations are accepted.

You may also refer the matter to the line manager of the official who conducted the audit to request a review, as well as to the departmental liaison officer (interlocuteur départemental) to obtain a fresh examination of your case.

As a last resort, you may in certain cases refer the matter to the departmental commission for direct taxes and turnover taxes (commission départementale des impôts directs et des taxes sur le chiffre d’affaires). In principle, such a referral will only be possible if you request it within 30 days of receiving the tax authorities’ response to your observations. This commission will in theory objectively examine all the elements of your case and may request new supporting documents. This last remedy brings your in-depth examination of personal tax situation (ESFP) to an end. The conclusions of the departmental commission for direct taxes and turnover taxes, which constitute only a consultative opinion that does not bind the tax authorities, may be favourable or unfavourable to the proposed reassessment. A letter will also remind you of the sums you will have to pay.

If you wish to dispute the sums to be paid and their collection, you will have to file a claim and, where applicable, a request for a stay of payment.

As you can see, there are therefore a great many remedies throughout the procedure, each of which constitutes a new opportunity to win your case, if not entirely, at least partially. Moreover, another significant advantage is that this prolongs the procedure, which delays accordingly the moment when you will have to pay any sums that remain payable by you.

4-           How to Demonstrate Your Good Will During an ESFP?

A tax audit intrudes into your private life. This is very often stressful. As a private individual, all your accounts are scrutinised: your expenses, your income, etc. This is a serious matter, which always begins with a registered letter with acknowledgement of receipt. You will need to build a solid and precise file, which you must submit within the time limits set.

At your first meeting at the tax office, you will receive a great deal of information that you will need to take into account in order to build your defence strategy and show that you are cooperating.

Even though the tax officials are not against you, they are concerned about certain grey areas in your finances and suspect possible fraud or, at the very least, certain omissions. Show them from the outset that you are cooperating to establish the truth. It is indeed in your interest always to maintain a climate of trust with the officials in charge of your case. Always be polite and courteous, even if the questions about your private life are endless and repetitive, and even if your invoices, accounts and expenses are being combed through. Explain yourself clearly and sincerely; the tax officials will pay attention to this. Stay calm, even if stress and irritation begin to overwhelm you. Any misconduct could be held against you.

In addition, it will be important to prepare your meetings carefully. To do so, you can seek advice from professionals in the field, such as a tax lawyer. Ask yourself the right questions. Why have you been summoned? Why are you the subject of a tax audit ? In a way, you will need to prepare your defence and your answers in order to be confident during the interviews. The officials would take your hesitations as admissions of guilt. Do not fall back on the easy, ready-made answers that auditors hear every day: “I didn’t know; I am in serious financial difficulty; It wasn’t me; etc. You will need to provide clear answers with legal value.

5-           The Various Reasons for a Tax Audit

The first question you may ask yourself after receiving a registered letter with acknowledgement of receipt is most likely: why me? What prompted the tax authorities to investigate your declarations, your income and your expenses? Several indicators may lead the tax authorities to initiate an ESFP.

a-           Desk Audit

First of all, an official carried out a desk audit (contrôle sur pièces), that is to say an audit conducted in their office, without you being notified. As a result, errors, omissions or inconsistencies came to light. If these contradictions are significant and, after the desk audit procedure, anomalies still remain, the official will then initiate a tax audit. As a general rule, you will not be informed of this first stage. The discrepancies that may alert the tax authorities may have been identified after reviewing two or more declarations, within a single declaration or between the declarations of persons belonging to the same household, or by comparing your declarations with information originating, for example, from the Urssaf, the Caf, your employer, your bank, etc. The tax official will conduct the investigation by cross-checking all this information.

b-          Audits Decided at Central Level

If the tax authorities detect anomalies in a particular sector, they may order audits of the profiles concerned or, more specifically, of certain transactions. The primary objective of these targeted operations will be to uncover new frauds and to prosecute the persons involved. These instructions may come from the Minister of the Economy himself or from the departmental directorate. These large-scale tax audit campaigns are designed to stop, or at least curb, tax abuses in a particular sector.

For example, they may target individuals who wrongly take advantage of the Pinel Law scheme or who carry out undeclared stock market transactions. If fraud is repeatedly detected among this type of profile, audits are then initiated.

It is therefore very important not to make any errors when completing your declaration, so that it is always consistent and you do not risk a tax audit, which is always unpleasant and rarely without consequences.

Finally, if the tax audit does take place, provide the requested information as quickly as possible. Explain yourself clearly, concisely and with good documentation in order to prove your good faith. You can obtain help from a tax lawyer, who will advise you on the attitude to adopt and on quickly putting your file together.

c-           The Discovery of New Information

The tax authorities are authorised to consult data from the Urssaf, pension funds or health insurance funds, as well as from banks: this is the right of disclosure (droit de communication). On studying this data, the tax authorities may identify inconsistencies with the declarations you previously filed.

A tax audit may therefore be initiated in order to check your file precisely and any errors that may be raised. Depending on the extent of the anomalies identified, you will be asked for supporting documents or a tax audit may be launched. Your lifestyle, expenses, income and assets will be examined to determine whether you are concealing taxable items.

d-          The Audit of a Third Party

Within the same family or the same household, individual declarations must be consistent with one another. After each annual declaration, the sums declared are in principle checked and they must, of course, match each other. As soon as a contradiction is identified, the tax officials will have to determine whether it is a simple error, an omission or fraud. In order to avoid a tax reassessment, it is recommended that you cooperate, provide the additional documents requested by the tax authorities and answer the questions precisely in order to justify yourself.

e-           You Have Not Declared Your Income

It goes without saying that failing to file a declaration will prompt the tax authorities to ask questions. Indeed, declaring your income every year is an obligation, even if you have no income or are not liable to tax. Sometimes a simple request is enough for a taxpayer to file their declaration, as they may not have known they had to do so. Occasionally, however, a formal notice is necessary to compel an individual to declare their income if previous letters have gone unanswered.

Finally, a tax audit may take place if a declaration is filed after many years and contains significant anomalies. Be aware that an automatic assessment (imposition d’office) may also be applied by the tax authorities if you do not respond to their multiple requests.

f-           Being Reported by a Third Party

Although this situation is rare, it does exist. Being reported by a third party, an acquaintance or a neighbour leads the tax authorities, in certain cases, to conduct an investigation to verify the grounds of the report: this is the desk audit. If, after this research, the official finds inconsistencies, errors or omissions, a tax audit may be ordered to verify whether fraud has indeed occurred.

6-           Do Not Forget to Check the Compliance of Your Procedure

Even though this is a very technical matter, it will be important to pay attention to the smallest details of your ESFP. Indeed, a tax official must rigorously follow the procedure. As a general rule, the tax authorities will take all the necessary precautions to avoid making any procedural error.

Such errors nevertheless exist; here are a few examples:

–             The tax authorities keep your original documents.

–             You were not informed of the possibility of being assisted by a professional in the field to advise you (such as a tax lawyer, for example.)

–             You did not receive the taxpayer’s charter (charte du contribuable), which must be provided to you.

–             You did not receive the proposed reassessment within the prescribed time limits.

–             Letter no. 2172 was not sent to your address, or you received it without it being sent by registered mail with acknowledgement of receipt.

–             Your tax reassessment is not sufficiently substantiated, both in law and in fact.

–             Your summonses and meetings with the tax officials were insufficient. You must have the opportunity to explain yourself, defend yourself and prove your good faith, in particular during an adversarial discussion. The tax authorities must prove that you were heard and must give you the time to be heard.

–             You are the victim of a mix-up of procedures: it is you, as a private individual, who is being audited. The tax authorities must not start auditing your business, if you have one.

–             A procedural defect. The tax authorities must inform you in writing when they request information about you from a bank located abroad, if you hold accounts there. Be vigilant!

This list is not exhaustive. Do not hesitate to seek advice from a tax lawyer to ensure that your rights are not violated. If an official makes an error, the entire procedure and the reassessments could be annulled.

In particular, be aware that a tax reassessment and an ESFP are only permitted, in most cases, until 31 December of the third year following the year in respect of which the tax is due (income for year N: until 31 December N+3), a period extended to 10 years in certain cases (undeclared foreign accounts, concealed activities…). Thus, if the tax authorities do not comply with these time limits, this will constitute a procedural defect. The same applies to an inconsistency in the dates or an annotation error, which could constitute a formal defect.

So do not hesitate to seek advice from a tax lawyer who knows all these subtleties and can put them to use for you. Being properly assisted will allow you to be more at ease. If you have made an error, or if errors are due to a lack of knowledge of highly technical laws, defence tools are available. Your tax lawyer will be able to advise you on the best way to defend yourself. Being present, taking part in your tax audit and responding to the tax authorities’ requests is very important in order to avoid an automatic reassessment (redressement d’office), which would be much simpler for the tax officials, with much higher reassessments, and quicker for them since they would not need to hear you, meet you, build a file, follow the procedure, etc.

7-           Conclusion

The consequences of a tax audit are numerous and should not be taken lightly. So be vigilant and always make sure to cooperate with the tax official in charge of your case in order to demonstrate your good faith and avoid an automatic taxation (taxation d’office).

Automatic taxation occurs when you do not give the tax authorities a sufficient explanation of certain bank transactions. When an official detects an anomaly in your declaration, they carry out an investigation to find its cause and may ask you, for example, about the origin of a given inflow of money. If you do not reply or if your explanations are deemed insufficient, the tax authorities could apply automatic taxation for income tax and social security contributions, the financial consequences of which are generally significant.

You must therefore always provide all the necessary documentation requested within the time limits laid down by law (invoices, account statements, etc.): all the documents that can convince the tax authorities that you have not carried on a parallel, undeclared activity. Seek advice from a tax lawyer, who will give you the benefit of their expertise in the field of tax law. They will assist you when you have to answer the questions put by the tax official. Your tax lawyer will also ensure that your rights as a taxpayer are always respected throughout the procedure.

Mixed accounts, accounts abroad, contradictory declarations within the same household, a difference between the sums declared and those shown on your account(s) of at least a factor of two, inactive accounts (a year without any transactions), an inconsistency of more than €150,000 compared with the income previously declared, regular and substantial cash deposits, transfers abroad, or a lifestyle that differs greatly from your declared income: for example, if you own a luxury car while your income is low, or if you buy a house without a loan while your income is modest. All these scenarios may alert the tax authorities and lead to a tax audit.

Don’t panic! Get support. Always remain courteous. Make use of the time available to perfect your defence with the advice of your tax lawyer. In this way, you will be able to build a rock-solid file with all the necessary supporting documents and adopt the ideal attitude during your meetings. The more present and involved you are in your tax audit, and the better assisted you are by a tax lawyer, the greater your chances of limiting the damage.