Undergoing a Tax Audit in France: What Happens and How to Respond

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, in some cases, an in-depth examination of personal tax situation (ESFP) is initiated.

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

Receipt of a Letter

The audit in principle begins with a letter (notice of an in-depth examination of personal tax situation) informing the taxpayer that it is being opened and generally asking for certain documents, most often bank statements. Other letters may then follow, asking for further details of the family situation, income, place of residence, etc.; each lists the documents to be provided and the clarifications expected, within a deadline that is in principle stated (often 60 days). Sending these documents promptly can demonstrate good cooperation. A tax lawyer can assist with these steps and help determine which documents to provide.

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.

Oral and Adversarial Discussion

Next, after and very often during this review, the oral and adversarial discussion takes place. The inspector presents any errors and omissions identified. During this discussion, it is possible to be assisted by a tax lawyer, who brings their experience, both on technical matters and on the strategy to adopt.

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 may then be initiated. This is the written procedure.

The Written Procedure

The written procedure comes into play when the explanations given do not seem sufficient to the tax authorities, or in the event of a lack of cooperation. The tax authorities may then send a request for justification (form no. 2172-SD) covering the year or years audited. The taxpayer in principle has two months to reply. This request is in principle possible where the bank credits amount to at least twice the declared income or exceed it by at least €150,000.

If the explanations or justifications still do not convince the tax authorities and discrepancies remain, they may send a formal notice to complete the reply within 30 days, concerning the amounts still unexplained.

Failing a sufficient reply within this period, the tax authorities may, in principle, tax the amounts that remain unexplained by way of an automatic assessment (article L69 of the LPF). A new tax base is then calculated; additional tax, with penalties and late-payment interest, frequently results.

3-           Available Remedies

Following a proposed reassessment (proposition de rectification), you will have the opportunity to justify the sums affected 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 in principle 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.

In certain cases, it is also possible to refer the matter to the departmental commission for direct taxes and turnover taxes. This referral is in principle requested within 30 days of receiving the tax authorities’ reply to the taxpayer’s observations. The commission examines the file and may request new supporting documents. Its conclusions, which are only a non-binding advisory opinion, may be favourable or unfavourable to the reassessment proposal. The tax authorities then notify, where applicable, the amounts put into collection.

If you wish to dispute the sums to be paid and their collection, a claim and, where applicable, a request for a stay of payment may be considered, preferably after the file has been analysed by a lawyer.

There are therefore many remedies throughout the procedure, each offering an opportunity to put forward one’s arguments and, depending on the case, to succeed in whole or in part. In addition, these remedies may, depending on the case, defer the payment of the disputed amounts (in particular where a stay of payment is requested).

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 generally begins with a registered letter with acknowledgement of receipt. A solid and precise file, submitted within the time limits set, is often decisive; a lawyer can help build it.

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

Even though the tax officials are not against you, they may have questions about certain grey areas in your finances and consider possible fraud or, at the very least, certain omissions. A cooperative attitude from the outset is generally appreciated, and a climate of trust with the officials in charge of the case can be an asset. Politeness and courtesy remain appropriate, even if the questions about your private life are long and repetitive, and your invoices, accounts and expenses are being combed through. Clear and sincere explanations, prepared if possible with a lawyer, in principle hold the officials' attention. Staying calm can also prevent any misconduct from being held against you.

In addition, it can be important to prepare your meetings carefully, ideally with a tax lawyer. A few questions can guide this preparation: why have you been summoned? Why are you the subject of a tax audit? Preparing your defence and your answers generally makes it easier to remain calm during the interviews; hesitations can sometimes be misinterpreted. The ready-made answers that auditors often hear ("I didn't know; I am in serious financial difficulty; It wasn't me; etc.") rarely convince: clear answers with a legal basis are in principle more effective.

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.

Desk Audit

First of all, an inspector may have carried out a desk audit, i.e. an audit from their office, without the taxpayer being informed. Errors, omissions or inconsistencies may have come to light on that occasion. If these anomalies are significant and remain after the desk audit, the tax authorities may open a tax audit. As a general rule, the taxpayer is not informed of this first stage. The discrepancies that may alert the tax authorities may have been identified by comparing two or more returns, within the same return or between the returns of persons belonging to the same household, or by comparing the returns with information from, for example, Urssaf, the Caf, the employer or the bank. The inspector then conducts the investigation by cross-checking all this information.

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.

An accurate and consistent return therefore limits the risk of a tax audit, which is often unpleasant and rarely without consequences.

Finally, if the tax audit does take place, it is generally preferable to consult a tax lawyer promptly, who can advise on the attitude to adopt and on putting the file together. Depending on the case, providing the requested information promptly, with clear, concise and documented explanations, can help establish your good faith.

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 thus be opened to check the file and any errors in detail. Depending on the extent of the anomalies identified, supporting documents may be requested or a tax audit may be carried out. Lifestyle, expenditure, income and assets may then be examined to check that no taxable item has been omitted.

The Audit of a Third Party

Within the same family or household, returns are in principle consistent with one another. After each annual return, the amounts declared are in principle cross-checked. Where a contradiction is found, the inspectors try to determine whether it is a simple error, an oversight or fraud. A cooperative attitude, sending the additional documents requested and precise answers, ideally prepared with a lawyer, can help to limit the risk of a reassessment.

You Have Not Declared Your Income

It goes without saying that failing to file a declaration will generally prompt the tax authorities to ask questions. Indeed, declaring your income every year is in principle 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 return is filed after many years and shows significant anomalies. Note: an automatic assessment may also be applied where repeated requests from the tax authorities go unanswered.

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.

Situations that attract the tax authorities’ attention

This examination, which is in fact a tax audit, triggers a procedure that allows the inspector to verify and analyse the bank accounts of the taxpayer subject to the procedure.

It is an audit whose purpose is to verify the consistency between the income declared and the taxpayer's financial situation. It is also a means of comparing the taxpayer's cash position with his or her lifestyle and that of the other members of the tax household. In this context, the inspector reviews all documents relating to bank transactions, such as the taxpayer's receipts and payments, which can be consulted on the account statements.

Where the examination reveals inconsistent bank credits, the tax authorities may send a request for clarification, or even for justification, concerning these amounts. If a request for justification goes unanswered, an automatic assessment may be applied. This request for justification does, however, in principle require the bank credits to amount to at least twice the declared income (the so-called “double” rule) or to exceed it by at least €150,000. In the absence of such discrepancies, the tax authorities may in principle request clarification, but not require justification under this procedure.

The situations that generally attract the particular interest of the tax authorities are the following:

• Mixed accounts: these are accounts used for both private and business purposes. Where the ESFP reveals an omission or under-declaration, the tax authorities may make a reassessment. Note: this audit can be carried out without falling within the specific framework of an accounting audit of the business. Separating private and business funds as far as possible (for example by using a dedicated business account) may therefore limit difficulties in the event of an audit.
• Where you have an inactive account: this can lead to surprising situations. In principle, an account is regarded as inactive after a year without any transaction initiated by its holder, and the bank may then charge inactivity fees. These dormant accounts, sometimes holding large sums, may alert the tax authorities and lead to an ESFP. The audit takes place at the tax office or, at the taxpayer’s request, at their home.
• When your bank account regularly records cash deposits, for amounts that are ultimately significant
• When your bank account has received sums from abroad, for significant amounts
• When you have made transfers abroad for significant amounts
• When you hold one or more undeclared foreign accounts
• When your lifestyle appears significantly out of line with your declared income: for example, the purchase of real estate without a loan for a large amount while declared income is low, the creation of a company with substantial capital while declared income is low, ownership of several high-end vehicles while declared income is low, etc.

These situations are often the starting point of an in-depth audit by the tax authorities. As regards so-called “dormant” accounts, specific legislation has, since 1 January 2016, made it possible to trace the holders of such accounts. It helps prevent the sums concerned from simply disappearing, or even allows them to be recovered, and is also used to trace the heirs of deceased holders.

6-           Checking the Compliance of the Procedure

Although this is a very technical subject, it may be important to look into the smallest details of the ESFP: the tax authorities are indeed required to follow the procedure strictly. As a general rule, they take all necessary precautions to avoid procedural errors.

Such errors nevertheless exist; here are a few examples:

• The original documents handed over were not returned.
• 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.)
• The charter of the rights and obligations of the audited taxpayer, which must in principle be provided with the audit notice, was not received.
• You did not receive the proposed reassessment within the prescribed time limits.
• Letter no. 2172 was not sent to the correct address, or its receipt cannot be established.
• Your tax reassessment is not sufficiently substantiated, both in law and in fact.
• The exchanges with the tax authorities were insufficient: the taxpayer must in principle have been able to explain themselves, defend themselves and show their good faith, in particular during an oral and adversarial discussion; the absence of such a discussion may, depending on the case, constitute an irregularity.
• A mixing of procedures: it is the individual who is being audited; the ESFP does not, in principle, allow the tax authorities to audit any business the individual owns.
• Failure to inform: where the tax authorities request information about the taxpayer from the tax authorities of another State (for example about bank accounts), their reassessment period may be extended, provided in principle that the taxpayer is informed of this request within 60 days of its dispatch (article L188 A of the LPF).

This list is not exhaustive. A tax lawyer can help ensure that your rights are respected. Depending on the nature of the irregularity, all or part of the procedure and reassessments may be cancelled.

Note: a tax reassessment, like an ESFP, is in principle only possible until 31 December of the third year following the year for 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, undeclared activities…). Failure to comply with these deadlines in principle renders the assessment irregular. An inconsistency in dates or a clerical error may also, depending on the case, constitute a formal defect.

A tax lawyer familiar with these subtleties can help to rely on them, and appropriate support generally makes it possible to approach the procedure more calmly. An error made in good faith, or due to a lack of knowledge of highly technical rules, may, depending on the case, be defended. Taking part in the tax audit and replying to the tax authorities’ requests are important: otherwise, an automatic assessment may be applied, a simpler and quicker procedure for the tax authorities, which then do not have to hear the taxpayer or follow the whole adversarial procedure, and which often results in much higher reassessments.

What I see in my cases

The audits I handle are desk audits and in-depth examinations of personal tax situation (ESFP). In both cases, the question the tax authorities ask most often concerns the origin of the funds: depending on the answer given and the supporting documents produced, reassessments will be heavier or lighter, or even impossible. This shows how much care each answer deserves, and I prefer to prepare each one in advance rather than at the last minute.

The advice I give almost all my clients is not to be more royalist than the king: under stress, people tend to say too much and to anticipate the questions. In my experience, moving forward step by step, answering exactly and precisely what is asked, is generally more effective. Worry is normal; my role is to remain objective about the situation and, if it is serious, to say so. As a general rule, an audit lasts six to twelve months.

7-           Conclusion

The consequences of a tax audit are numerous and should not be taken lightly. A vigilant and cooperative attitude towards the official in charge of the case can, depending on the case, help demonstrate your good faith and avoid automatic taxation (taxation d'office); a lawyer's support makes it possible to adapt this attitude to your situation.

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.

It is thus in principle useful to provide, within the time limits laid down by law, the documentation requested (invoices, account statements, etc.), i.e. the documents that can convince the tax authorities that you have not carried on a parallel, undeclared activity. A tax lawyer can give you the benefit of their experience of tax law, assist you when you answer the official's questions and ensure that your rights as a taxpayer are 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.

No need to panic: being supported by a tax lawyer generally makes it possible to approach the procedure more calmly. Courtesy remains appropriate, and the time limits can be used to prepare the defence with your lawyer, build a solid file with the relevant supporting documents and adopt the most appropriate attitude during meetings. Real involvement in the procedure, with a lawyer's assistance, can improve the chances of limiting the consequences of the audit.

FAQ

Read more

• What Are the Forms of Tax Audit?
• I Have Received a Tax Reassessment Proposal: What Should I Do?
• Tax Audit: 12 Procedural Defects That May Lead to Reassessments Being Annulled
• Tax Audit: Why Me? What Triggers an Audit?
• The Right of Disclosure (Droit de Communication): Tax Office Powers