Tax audit - Process - Individuals

This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing business in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.  

 The process outlined below focuses only on the full audit of the taxpayer individual position "ESFP" (see more about this subject in ESFP) which is the most frequent type of audit used by the French tax authorities to audit individuals.

Generally, individuals having multiple sources of earnings or very high revenues are audited by the national directorate for the examination of fiscal revenue "DNVSF". The other taxpayers are audited by the interregional or the district income checking teams.

The managers of audited legal entity may be also audited on their personal income as part of the tax audit of their business. In such case they must receive one notice concerning the full audit of their individual position and a second notice addressing the audit of their business. If the tax authorities suspect that a fraud has been committed, the field audit may be done by an investigation team belonging to the national directorate for fiscal information "DNEF". Before mailing the notice of tax audit, the auditor studies the taxpayer's file i.e. all the tax returns received by the local tax office and the information received from third parties (Other public services, banks etc.) or from the national directorate for fiscal information "DNEF" which primary task is to collect information related to taxpayers.

This first layer of investigation allows the tax auditor to select the potential tax exposures and to prepare his road map for the field audit. This audit plan must be approved by his supervisor. As soon as the audit plan is approved, the tax auditor mails with an acknowledgement of receipt a notice of tax audit to the manager of the entity. The entire audit process is void if the notice of audit does not mention that the taxpayer may be assisted by a tax advisor. The notice of tax audit mentions the first day of the audit, the name, the address and the phone number of the auditor and of his supervisor. There is also the name of the person the taxpayer may contact in case of difficulties during the audit "Interlocuteur départemental".

The audit is generally performed at the tax office. Upon request, the audit may be also done at another place i.e. the tax advisor's office, the taxpayer's business office or the taxpayer's permanent residence. A copy of the booklet outlining the rights and obligations of the taxpayer during a field audit must be stapled to the notice of audit. An ESFP is void if it lasts more than one year from the reception of the notice of audit by the taxpayer. If during the audit, the tax auditor discovers an undisclosed business activity or if it is necessary to request information from the court, the delay will be extended one additional year. During the first few meeting the tax auditor will request the list of the French and foreign bank accounts and a copy of all the bank records of the tax payer.

The tax auditor will use the bank records to compare the income and assets known from the tax returns with the taxpayer's expenditure pattern and the changes in his private assets and estate. If there are discrepancies, the tax auditor requests the taxpayer to explain and justify the inconsistency. The taxpayer must answer in a period which cannot be shorter than 2 months. If his answer is not satisfactory, the auditor may request additional explanations and/or justifications in the next 30 days.

If the taxpayer does not answer or if the answer does not explain and/or justify the inconsistency, the auditor has the right to estimate the income underreported in the tax return and proceed to the tax assessment without any further investigation. If the answers explain and justify all the inconsistencies or if no inconsistencies are found, the tax payer receives a formal notice stating that the tax auditor found no discrepancies in the taxpayer's personal tax position.

If the answers of the taxpayer give evidence that income was concealed or underreported, the taxpayer receives by mail with return receipt a formal notice of assessment. The notice mentions all issues resulting in additional tax assessments and details for each issue why the tax authorities disagree with the tax payer.

The notice mentions the amount of the tax assessment, the late interest and if applicable the penalties. The taxpayer must respond in a 30-day period. If he does not answer, he is deemed to agree with position of the auditor as explained in the notice. The tax authorities have the right to collect the tax assessments plus late interest and penalties if any. If the taxpayer responds to the notice in the 30-day period, the tax authorities mail back a letter with acknowledgement of receipt confirming the assessments they maintain and surrendering the assessments for which the taxpayer provided satisfactory explanations.

After this letter the tax authorities have the right to collect the tax assessments plus late interest and penalties if any. When the tax authorities decide to collect the assessments, the tax auditor must prepare an audit report according to a standard format. The audit report is joined to the tax file of the tax payer. The audit report describes all the investigations made by the tax auditor during the audit and its conclusions. This report will be automatically used during the next tax audits.

Extension of the use of private experts as of January 1st, 2007:

PRIOR RULES:
During a tax audit or litigation, French tax administration can only request the expertise from civil servants.

NEW RULES:
The French tax administration may use private experts from the private sector and use them for all purposes including the rulings (Valuation of non listed companies, Intellectual property, Valuation of arts pieces etc ...)

Objectivity of tax auditors

The lack of objectivity of tax auditors during a tax audit is frequently alleged while difficult to prove.

In a recent case reviewed by the Supreme administrative Court, the manager of an audited company argued that the tax auditor and his spouse, lived near by their own house and that their relationship with them was difficult.  As a consequence the manager questioned the objectivity of the tax auditor and the fairness of the audit. 

The administrative supreme Court agreed and ruled that, because of the conflicting relationship, the tax audit cannot be considered as granting all the necessary guarantees of neutrality.