A notice of audit or a request for information from the tax authorities often raises the same question: why me? Tax audits are in principle not a matter of chance. They generally result from cross-checking returns against the many items of information held by the tax authorities, from data analysis, from national guidelines or from information passed on by third parties, including foreign tax administrations.
This article presents the main factors that may trigger a tax audit, for individuals and businesses alike, and what happens next. The presence of one of these factors does not mean that an audit will take place; conversely, an audit does not mean that there is an irregularity. When an audit is opened, the assistance of a lawyer from the outset is generally useful.
In brief
- France has a self-assessment system: tax audits are its counterpart, and anyone taxable in France may be audited.
- Most audits result from cross-checks between returns and information received from third parties: employers, banks, notaries, platforms, social security bodies, foreign administrations.
- The tax authorities use data analysis tools to spot inconsistencies, for example between wealth and declared income.
- Foreign accounts and income receive particular attention, because of the automatic exchange of information between States.
- A denunciation may trigger an audit, but the authorities in principle check its reliability; the law also allows certain “tax informants” to be rewarded.
Contents
Why do tax audits exist?
The French tax system is based on returns: each taxpayer declares their own income, real estate subject to the IFI or transactions, and the tax authorities then check these returns. Withholding at source has not changed this principle: it only concerns how the tax is paid.
The tax audit is the counterpart of this system. It may be carried out from the office, on the basis of the returns and the information held by the authorities (desk audit), or take the form of an in-depth audit, such as the in-depth examination of personal tax situation (ESFP) for an individual or the accounting audit for a business. These procedures are presented in the article what are the forms of tax audit?.
Cross-checking information
The first task of the tax authorities is to compare returns with the information they receive from third parties. Pre-filled returns limit omissions on salaries or pensions; attention therefore focuses more on the items that taxpayers declare themselves: rental income, capital gains, investment income, tax reductions and credits.
To do so, the authorities have many sources: returns filed by employers and banks, notarial deeds (property purchases, inheritances, gifts), information from social security bodies, online platforms or the judicial authorities. They may also question third parties through their right of disclosure. Financial institutions must also report suspicious transactions to Tracfin, the French financial intelligence unit, which may pass information on to the tax authorities.
Lastly, the authorities use data analysis tools (data mining) to detect inconsistencies, for example a lifestyle or wealth out of line with declared income.
Information from abroad
Income and assets held outside France are one of the main focuses of audits. Through the automatic exchange of bank data (CRS), the authorities receive information every year on accounts held abroad by French residents; they may also send requests for information to other States under tax treaties. A foreign account not reported on form no. 3916, foreign income missing from the return or regular transfers abroad may therefore attract their attention.
The article do the tax authorities have access to your foreign bank accounts? details these mechanisms. Where foreign accounts or income have not been reported, a regularisation may, depending on the case, be considered; whether to proceed deserves to be examined with a lawyer.
Other factors that may attract attention
For individuals, other factors may lead the authorities to take an interest in a file:
| Factor | Examples |
|---|---|
| Change of situation | Sharp rise or fall in income, large capital gain (for example on the sale of a business), large inheritance, children attached to the household, maintenance payments |
| Tax advantages | Large tax reductions or credits, tax-efficient investments, high deductible expenses |
| Real estate | Purchase of a property without a loan although declared income is modest, short-term furnished lettings, gap between the value declared for IFI and a sale price |
| Bank movements | Large or repeated cash deposits, frequent transfers from or to other countries |
| Failure or delay in filing | Return filed late or incompletely after several years without filing |
Denunciations and tax informants
A denunciation may also trigger an audit. It remains marginal, and the authorities in principle check its reliability before acting. In addition, since 2017 the law has allowed the authorities to reward, under certain conditions, “tax informants” (aviseurs fiscaux) who provide information leading to the discovery of certain serious breaches, in particular international ones (undeclared foreign accounts, fictitious tax domicile, transfer pricing) or relating to VAT (article L10-0 AC of the French Tax Procedure Code).
What triggers an audit of a business?
For businesses, selection is largely based on objective criteria and risk analyses. Among the signals often mentioned:
- relations with other countries: flows with low-tax States, prices charged between related companies (transfer pricing), companies or subsidiaries held outside France;
- a foreign company carrying on business in France without reporting its profits there;
- sectors where cash payments or undeclared work are more frequent, which are the subject of audit guidelines;
- unusual ratios: low stock turnover, low turnover per employee, large and persistent losses;
- a mismatch between declared turnover and declared VAT;
- restructuring operations (mergers, contributions) carried out under a preferential regime;
- a previous audit that led to adjustments, or a “knock-on” audit following that of a customer or supplier.
What happens next?
An audit does not necessarily lead to a reassessment. When the authorities intend to make adjustments, they in principle send a reasoned proposed reassessment, to which the taxpayer may reply within thirty days, extendable by thirty days on request. Taxpayers have significant safeguards throughout the procedure, and irregularities may, depending on the case, lead to the cancellation of all or part of the reassessments (see the article on procedural flaws). The article I am undergoing a tax audit: what will happen? describes how an audit unfolds.
The assistance of a lawyer generally makes it possible to analyse the points raised by the authorities, prepare the replies, check that the procedure is regular and, where appropriate, discuss the amounts assessed or the penalties.
What I see in my cases
What has changed most in recent years is the exchange of information between countries: the tax authorities receive information from all over the world and make full use of it. In my cases, undeclared foreign accounts are almost always discovered in this way, and the procedure begins with a letter from the tax authorities. In the current budgetary context, they are also paying increasing attention to assets held abroad and to trusts.
The audits I handle are desk audits and in-depth examinations of personal tax situation (ESFP). The question that comes up most often in them concerns the origin of the funds.
FAQ
Are tax audits drawn at random?
In principle no: selection is based on cross-checks, risk analyses and audit guidelines set by the tax authorities.
Does an account abroad increase the risk of an audit?
A properly reported foreign account is not in itself an irregularity. However, an unreported account may be revealed by the automatic exchange of information, and the consequences can be significant: fines, surcharges, extended reassessment period.
Can an anonymous denunciation trigger an audit?
It may attract the attention of the tax authorities, which in principle check the reliability of the information before opening a procedure. This way of triggering an audit remains marginal.
How many years back can the tax authorities go?
For income tax, in principle until the end of the third year following the year for which the tax is due. This period is extended to ten years in certain cases, in particular for unreported foreign accounts, subject to exceptions.
Does a large bank transaction lead to an audit?
Not necessarily. Financial institutions must report suspicious transactions to Tracfin, which may pass information on to the tax authorities. Keeping evidence of the origin of the funds may make explanations easier if questions are asked.
Read more
- Undergoing a Tax Audit in France: What Happens and How to Respond
- What Are the Forms of Tax Audit?
- The Right of Disclosure (Droit de Communication): Tax Office Powers
- Can the French Tax Authorities See Your Foreign Bank Accounts?
- Tax Audit: 12 Procedural Defects That May Lead to Reassessments Being Annulled
