In France, income tax is based on a self-assessment system: each taxpayer declares his or her own income and taxable assets. Tax fraud consists in deliberately evading tax, in whole or in part, by unlawful means.
What is the difference between fraud, a simple error and tax avoidance? What tax and criminal penalties are incurred? How do the tax authorities detect fraud, in particular international fraud? This article looks at these questions, without replacing a lawyer’s analysis of a particular situation.
In brief
- Tax fraud requires intent: a good-faith error is not fraud.
- The tax consequences range from late-payment interest (0.20% per month) to surcharges of 10%, 40%, 80% or 100% depending on the seriousness of the facts.
- The offence of tax fraud may be punished by five years’ imprisonment and a €500,000 fine, increased to seven years and €3,000,000 in particular where accounts held abroad are used.
- Serious frauds are referred to the public prosecutor under the conditions laid down by law.
- The automatic exchange of information between States and data mining make it easier to detect international fraud.
Contents
Tax fraud: legal definition
Under article 1741 of the French Tax Code (CGI), tax fraud is committed by anyone who has fraudulently evaded, or attempted to evade, the assessment or payment of tax. The law refers in particular to:
- deliberately failing to file a return on time;
- deliberately concealing part of the taxable amounts (income or assets);
- organising one’s insolvency or using schemes to obstruct the collection of tax;
- any other fraudulent means of evading tax.
In the case of concealment, criminal proceedings in principle require the concealed amounts to exceed one tenth of the taxable amount or €153. Fraud may then lead to money laundering, i.e. reintroducing the sums withheld from tax into the legal economy, for example by means of a bank account abroad.
Error, avoidance or fraud: how to tell them apart?
Tax fraud and tax avoidance
Tax fraud should not be confused with tax avoidance (évasion fiscale). As generally understood, tax avoidance consists in reducing tax by using the possibilities offered by tax rules, in particular international ones, for example:
- by locating profits or assets in another country;
- by using preferential tax schemes.
Tax avoidance is not unlawful in itself, but it is limited by the abuse of law doctrine: the tax authorities may disregard sham transactions or those which, seeking the benefit of a literal application of the texts contrary to the intention of their authors, were motivated solely by a tax purpose (article L64 of the Tax Procedure Code, LPF).
Tax rulings and the right to make an error
Where there is doubt about the application of a provision, any taxpayer may ask the tax authorities for their position on his or her situation: this is the tax ruling (rescrit fiscal). The request may concern most taxes: income tax, real estate wealth tax, VAT, registration duties, etc. The position taken by the tax authorities is in principle binding on them.
In addition, the right to make an error allows a taxpayer acting in good faith who voluntarily corrects an error to benefit, subject to conditions, from a reduction in late-payment interest.
The suspicious transaction report for tax fraud
Professionals subject to anti-money laundering obligations (banks, insurers, chartered accountants, notaries, etc.) must file a suspicious transaction report with Tracfin where they suspect that a transaction stems from tax fraud and at least one criterion defined by decree is met, for example:
- the use of a shell company established in a non-cooperative State or territory;
- the receipt of large sums in cash;
- the receipt of large sums from abroad without justification;
- financial transactions with no apparent consistency;
- anomalies in the invoices or purchase orders presented as supporting documents (no address, date, registration number, etc.);
- international transfers of funds with no apparent economic or legal reason;
- refusal to provide evidence of the origin of funds received.
The tax consequences
Late-payment interest
Where tax has been underpaid, the tax authorities apply late-payment interest of 0.20% per month (i.e. 2.4% per year), which compensates for the financial loss suffered by the Treasury. It is in principle due even in good faith. Since the 2018 ESSOC law, it may be reduced by 50% where a taxpayer acting in good faith voluntarily corrects the situation, and by 30% where the correction is made during an audit.
Surcharges
Surcharges may be added to late-payment interest. Their rate depends on the nature and seriousness of the facts:
| Situation | Surcharge in principle |
|---|---|
| Failure to file or late filing, without formal notice | 10% |
| Income tax return filed within 30 days of a formal notice | 20% (10% for most other taxes) |
| Return not filed within 30 days of a formal notice | 40% |
| Discovery of an undeclared activity | 80% |
| Good-faith under-declaration (income tax) | 10%, unless voluntarily corrected or corrected within 30 days of a request from the tax authorities |
| Deliberate failure | 40% |
| Abuse of law | 80% (40% if the taxpayer was neither the main initiator nor the main beneficiary) |
| Fraudulent schemes | 80% |
| Obstruction of a tax audit | 100% |
In addition, a legal, financial or accounting adviser who has intentionally provided a service enabling a taxpayer to use fraudulent schemes or commit an abuse of law incurs a fine equal to 50% of the income derived from that service.
Criminal penalties
Independently of tax penalties, tax fraud is a criminal offence. Depending on the case, the offender faces:
- a fine of €500,000, which may be increased to twice the proceeds of the offence, and five years’ imprisonment;
- a fine of €3,000,000, which may be increased to twice the proceeds of the offence, and seven years’ imprisonment where the fraud was committed by an organised gang or carried out or facilitated by means of accounts opened or contracts taken out abroad, the interposition of persons or entities established abroad, a false identity or false documents, or a sham tax domicile abroad.
The prison sentence incurred is halved where the offender or accomplice, having alerted the administrative or judicial authorities, has made it possible to stop the offence or identify the other offenders or accomplices.
Since the law of 23 October 2018 on combating fraud, the tax authorities must in principle report the most serious cases to the public prosecutor, in particular where the tax reassessed exceeds €100,000 and is subject to certain surcharges (article L228 of the LPF). Proceedings may in principle be brought until the end of the sixth year following the year in which the offence was committed.
Other offences
Other criminal offences exist in tax matters, for example obstructing tax officers in the performance of their duties, organising a collective refusal to pay tax, certain VAT frauds prosecuted as fraud under article 313-1 of the French Criminal Code, or professionals taking part in the preparation of false accounting entries.
International tax fraud: informants and detection
Informants. Since 2017, the tax authorities may compensate a person who provides them with information leading to the discovery of certain serious breaches, originally of an international nature. This scheme, initially experimental, has been extended (in particular to certain VAT breaches) and then made permanent (article L10-0 AC of the LPF). Lawyers, who are bound by professional secrecy, may not disclose information about their clients.
Detection. The automatic exchange of bank account information between States, operational since 2017, allows the French tax authorities to receive information every year on accounts held abroad by residents of France. The tax authorities also use data-mining tools to target their audits.
FAQ
Is a simple error in a return tax fraud?
In principle, no. Fraud requires intent: deliberately evading tax. A good-faith error in principle gives rise to payment of the tax evaded and late-payment interest, with, for income tax, a 10% surcharge unless the error is voluntarily or promptly corrected. The right to make an error also makes it possible, subject to conditions, to reduce late-payment interest.
What penalties are incurred for tax fraud?
The offence of tax fraud may be punished by five years’ imprisonment and a €500,000 fine, which may be increased to twice the proceeds of the offence. The penalties are increased to seven years and €3,000,000 in aggravating circumstances, in particular the use of accounts opened abroad or a sham domicile abroad. These penalties may be added to tax penalties.
Is holding a bank account abroad fraud?
In principle, no: holding an account abroad is lawful. However, accounts opened, held, used or closed abroad must in principle be declared every year, and the income they generate is in principle taxable in France for a French tax resident. Failure to declare them exposes the taxpayer to fines and, in the event of fraud, to aggravated penalties.
