Digital tools and the revolution they have brought about have benefited everyone in terms of productivity. Online filing and online payment have freed up resources. The Directorate General of Public Finances (Direction générale des Finances publiques, DGFIP), like many other departments, has been able to reassign some of its staff to other tasks.

Tax audits of individuals and businesses can therefore be carried out more diligently. While their frequency has increased, one may nevertheless wonder what draws the attention of the tax authorities and ultimately triggers verification measures. Our tax law firm provides some answers to this recurring question.

How does the tax return become the primary contributor to the tax audit procedure?

We have a tax system based on self-declaration. The introduction of withholding tax at source only affects the actual methods of paying the tax. Consequently, it is the various income amounts declared by taxpayers, whether individuals or businesses, that are checked in the tax offices to see whether or not they can be considered reliable. On the other hand, the tax authorities have the right to carry out on-site audits, which balances this self-declaration system.

The tax audit is in a sense the counterpart of the tax return. It is by initiating an “on-site or desk audit” that officials of the Directorate General of Public Finances can verify the sincerity and accuracy of the returns filed by taxpayers.

The first cross-checking exercise consists of comparing the income declared by taxpayers with that paid by employers.

The purpose of this verification is to identify certain omissions. This exercise is less and less conclusive for the tax authorities since return forms are now pre-filled, leaving little room for errors or omissions. These returns contain a great deal of data, and taxpayers usually just read them through before validating.

Withholding tax at source (prélèvement à la source, PAS) has also turned the tax authorities’ sights towards income that is not subject to direct withholding from salary. This mainly concerns income from gains on movable capital, disproportionate contributions, etc. The DGFIP takes a detailed interest in the items declared on the forms attached to the return, such as income from property transactions, for example, as well as in amounts offset against tax through a tax credit or a reduction. Taxpayers filing online, who do not have to attach supporting documents for this income, are more exposed to checks.

It should also be remembered that the tax authorities have increasingly rich databases thanks to the IT resources made available to them. In this context, establishing matches and detecting possible inconsistencies between declared income and information external to the files is easier. This may include, in particular, discrepancies between wealth and the income officially declared by the taxpayer.
It should be added that the software used by tax officials is increasingly powerful. It has become capable of spotting reporting discrepancies almost instantly.
This leads us to warn you about the growing number of requests for information or justification. Indeed, when the tax authorities detect an inconsistency, they will generally begin by asking you questions and requesting clarifications. These requests may then give rise to a proposed rectification (that is, reassessments).
Where there are suspicions about the accuracy of your returns, both personally and for your business, a public finance inspector may decide to initiate an in-depth audit of personal tax situation (examen contradictoire de situation fiscale personnelle, ESFP) and/or a notice of accounts examination or accounting audit.

What are the main reasons for a tax audit?

The causes of a tax audit are too numerous and varied to be listed exhaustively. Some are a matter of common sense, while others stem from external reasons over which you have no control. We can nevertheless list those most commonly used by the tax authorities.

• Certain national directives: inspectors receive national or local directives asking them to audit a particular business sector or profession (construction, private hire drivers (VTC), restaurant owners, engineering firms, etc.) that finds itself in the authorities’ sights. This can happen unexpectedly. These checks may thus be more or less targeted, for example on the research tax credit.
• The “knock-on” audit prompted by a third party: the audit of a company may inform the authorities about a principal or a subcontractor with which you have business relations. Certain inconsistencies may prompt them to carry out an audit if the tax authorities realise that there has been VAT fraud, for example. This is in a sense a “snowball effect” that can reach the suppliers and business customers of the audited company and may affect you.
• Various sources of information: these come from URSSAF, social security bodies, ongoing exchanges with foreign administrations under bilateral agreements, banks and other similar financial institutions, and the judicial system. They may come from extracts of notarial deeds relating to a property purchase, an inheritance or a gift, etc.
• Failure to file a return: if you have never filed a return and suddenly do so in an incomplete manner, this may alert the authorities. In some cases, failure to file a return may lead to immediate taxation without formal notice, as regards VAT, for example.
• Denunciation by a third party: this is obviously a source of tax audits that is used with great caution. It is nevertheless established that some audits are triggered by an informant’s tip-off. This remains marginal and does not reflect the usual practices of the tax authorities, which in principle take care to cross-check the “reliability” of the information provided by the informant before initiating the audit.

Who may be concerned by this type of audit?

Anyone may be subject to such a tax audit. All French tax residents may indeed be audited for tax purposes as long as they receive taxable income, whatever its source, in accordance with the provisions of Articles 4 A, 4 B and 4 bis of the French General Tax Code (Code général des impôts, CGI).
Remember that the expression “whatever its source” covers the most varied activities, some of which fall outside the legal framework. Indeed, by way of illustration, profits derived from illegal activities punishable under criminal law, such as embezzlement committed by an employee against their employer or by a bank employee to the detriment of a client, or income from drug trafficking, procuring, etc., are also subject to income tax and sometimes even to VAT!
Although any taxpayer may be subject to a tax audit, the Directorate General of Public Finances focuses mainly on those whose files are incomplete or show reporting inconsistencies. This approach reflects a genuine concern for profitability in the literal sense of the term.

If the tax authorities conclude that there are proven omissions or inaccuracies following a desk audit, an accounts examination or an accounting audit, or an in-depth audit of personal tax situation (ESFP), the taxpayer will inevitably receive a proposed rectification.

What are the characteristics of a proposed rectification?

It is a crucial procedural step that must be initiated in a way that preserves your ability to express your observations in accordance with the provisions expressly set out in Article L. 57 of the French Tax Procedures Handbook (Livre des procédures fiscales, LPF) and endorsed in the Official Public Finances Bulletin (BOFiP) CF-IOR-10-40 of 4 October 2017.
Significant rights and guarantees are granted to the taxpayer in the context of audit procedures. The taxpayer has numerous possible courses of action and numerous legal provisions enabling them to defend their interests against the tax authorities. The remedies available are generally effective but complex to apply, hence the importance of being assisted by a tax lawyer.

The advantages of your tax lawyer

It is obviously with this in mind that using a tax lawyer, a specialist in these complex and sometimes inextricable situations, becomes the preferred solution. In order to convince the tax authorities to grant you a significant remission of the penalties, genuine mastery of the subtleties of tax legislation is required in order to choose an effective strategy.

As a professional well versed in this kind of exercise, your adviser knows all the levers of a negotiation conducted by the rules with the inspector, or even their superiors. They know how to detect a possible procedural defect that occurred during the audit. It then becomes possible to bring an action leading to the complete cancellation of the reassessments to which you would otherwise have been subject.
One of the first and main tasks of the tax lawyer is to demonstrate that the tax bases arrived at by the tax authorities at the end of the tax audit have been overestimated. This is a situation faced by many taxpayers who have tried to handle a procedure without choosing the support of a tax expert.

In conclusion, we would remind you that the expertise of a tax adviser to defend your interests with a view to a favourable resolution remains essential. The firm is at your side to guide you through the various stages of the procedure, to help you adopt the best strategy and ultimately to equip you with the best legislative tools.