13. Tax Inspections in France

1. Levels of Tax Control
2. Tax Penalties & Sanctions
3. Recovery of Unpaid French Taxes
4. French Tax Claims
5. Determination of Tax Status

Whilst you may think that submission of your tax return is the end of the matter, it is not necessarily the case, as you may later be subject to a tax investigation/compliance check by the authorities.

Each year many thousands of taxpayers (business owners and individuals) are subject to a tax compliance check. The government normally recovers billions in underpaid taxes and fines!

In the main, the authorities prioritise investigation into business operations. Nevertheless, it is not unusual for an individual taxpayer to be asked for a written response to one or more queries concerning their tax return.

Be aware also that the level of cross-border exchange of information in Europe and across the world is now very substantial, that financial institutions and professional advisors have an obligation to inform the tax authority of suspicious transactions, and that the government itself uses sophisticated 'data mining' techniques to track the activities of individuals and businesses, which may trigger a tax investigation. Such techniques include the use of social media websites.

13.1. Levels of Control

There are three levels of compliance checks exercised by the tax authorities.

At the first level they will undertake verification that you have correctly completed the return and, if so, you will hear no more from them until your receive your tax notice. The is process is called le contrôle formel.

At a second level you may later receive a (recorded delivery) letter from them asking for clarification, or further details, often in the form of a questionnaire, which you will need to complete and return to them. This is process is called le contrôle sur pièces.

Thus, if there appears to be some inconsistency in the information provided on the tax declaration, or your circumstances have changed significantly from your last return, or you are seeking a tax concession, a demand for further information may be made.

If you are merely asked for further information to clarify you will be given 30 days in which to respond; if you are asked to provide documentary justiification you will be given two months.

It is important you reply within these timescales, failing which the tax authority can proceed to simply impose a tax charge upon you. You may also receive a fine. This procedure is known as taxation d’office.

Accordingly, make sure you keep all paperwork associated with your tax affairs in good order. You are required by law to keep them for a minimum of six years.

More often than not it is slight errors in the compilation of a tax return than can lead to the authorities digging deeper, so time and money spent ensuring your tax return is property completed is never wasted.

At a third level they will undertake a detailed investigation, (called la vérification approfondie) into your case, about which you will be specifically informed. These investigations are undertaken by a specialist branch of the tax authority called l'Inspection générale des Finances.

Their detailed investigation into the tax affairs of and individual taxpayer takes the form of an examen contradictoire de l'ensemble de la situation fiscale personnelle (ESFP), whilst that for a business and professionals a vérification de comptabilité.

The risk of such an investigation happening to an invidividual taxpayer is very low, despite the impression which may be given by tax advisors, or the tax authority themselves!

As a general rule the major focus of enquiry is on larger business operations (notably the recovery of underpaid VAT) and on those sectors where where cash payments are widely used, e.g. building sector, bars and restaurants.

However, if they so choose to do so, in investigating your circumstances the tentacles of the tax authority can be very long.

In business cases it is not unusual for the tax authority to seek judicial consent to make unannounced visits to premises, and to seize documentation and computer equipment.

One protection afforded to taxpayers in all of this is that, if the tax authority do undertake an investigation, once completed they cannot go back and reopen the case and the investigation is limited to one year.

There is a health warning to be given over tax avoidance schemes and tax arrangements that may be recommended to you by tax advisors, accountants or lawyers.

Even though the scheme may be strictly within the law, if the tax authority later judge it to have been divised merely to reduce liability to the payment of tax they can declare the scheme to be void.

If so, the scheme is called an abus de droit.

Notable schemes which have fallen foul of this general principle are those which try to get round the rigid French inheritance laws.

You could then be liable for payment of the arrears of tax and penalties.

The golden rule – by all means use advisors, but make sure all discussions with them are recorded in writing, and that letters are posted by recorded delivery, lettre recommandée avec accusé de réception.

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