A tax audit is very often experienced as a psychological ordeal, because it causes stress and drags on over time.
The tax authorities, reputed - rightly or wrongly – to hold exorbitant powers and to act with severity, contribute to a large extent to the stress felt.
Tax audit: how to defend yourself with a tax lawyer
I have been handling tax audits for 15 years, and I would like to say two things to taxpayers going through one:
- The tax authorities have significant powers…
- But so does the well-informed taxpayer! As I like to be pragmatic, I will describe the taxpayer's concrete powers in the rest of this article; you will see that they actually have many
Over the past 15 years, I have assisted a great many clients, both businesses and private individuals, in tax audit matters.
I am sharing my practical experience as a tax lawyer in order to give you a real idea of what a tax audit is and how to defend yourself.
Why am I being audited? Is it just "bad luck"? Was I reported?
No; in the vast majority of cases, the tax authorities have detected, rightly or wrongly, what appeared to them to be tax anomalies. For example:
- Inconsistencies between your various returns, whether purely tax returns or other types (Urssaf, Caf…)
- The tax audit of another person (often a business) led them to you. During the audit of a company, they discovered invoices issued by your company which appeared to them to contain anomalies or to be fictitious. Or, during the audit of a company, they saw that certain sums had been paid to you…
- A foreign bank informed them that you held an account. Yet the tax authorities found no foreign account declaration in your tax returns
- A bank, often a French one, provided them with information about you or your business: large sums were credited to your account in cash, sums were received from abroad…
- The registration department (service de l’enregistrement, which records property acquisitions) informed them that you had just acquired a property for €1,000,000 without taking out a loan, yet, looking at your past tax returns, you declare only a low income…
- Etc… The list could be very long, but, as you will have understood, a tax audit is very often triggered following anomalies, in the eyes of the tax authorities, in your financial/tax situation
OK, what do we do now?
You have received the letter informing you that a tax audit has been initiated against you or your company. If it concerns you, the letter refers to "an in-depth examination of personal tax situation (examen de la situation fiscale personnelle)"; if it concerns your company, it refers to "an accounting audit (vérification de comptabilité)" or to an "accounting review (examen de comptabilité)".
If it concerns you: you will have to prepare a large number of documents to be presented, in principle, at the first meeting with the tax authorities. These documents are listed in the letter you received. The main documents to gather are bank account statements.
If it concerns your company, you will have to prepare the FEC (fichiers d’écritures comptables, "accounting entries files"). To put it simply, this is in fact your accounts in electronic format. If you have an accountant, ask them for these files.
At this stage, there is not much more to do. The serious business will begin at the first meeting.
How does the first meeting go?
During this first meeting, the tax authorities' main aim is to collect the documents requested in the letter (see above).
General questions will be put to you: your business, your sources of income… generally nothing very specific. The tax authorities familiarise themselves with the general context of your situation.
This first meeting will generally be followed by two to four further meetings, with, at the end, a final meeting known as the "closing meeting" (réunion de synthèse), during which the tax authorities announce the reassessments they intend to apply.
Of course, if your situation is perfectly clear and transparent and you had filed all your returns properly, no reassessment will be applied.
But this is rarely the case, especially if the tax authorities are already involved, which therefore implies that anomalies have been detected. Make no mistake: although the tax authorities should absolutely not be demonised, the inspector is there because significant anomalies have been detected, and therefore generally expects to come out of the audit with reassessments.
Their time is valuable and, like any worker, they are expected to perform.
The assistance of a tax lawyer is therefore recommended from the outset, from the very first meeting.
OK, how do I defend myself, what are my options, what are my powers?
They are numerous and complex. Tax procedure is very complicated and subtle. Once again, get assistance from a tax lawyer.
But here are a few examples:
First, there are thousands of texts applicable in tax law. It will often be possible to find one or more texts that are favourable to you. This requires long and complicated tax research in professional databases (legislation, administrative doctrine, case law…). These texts will be set against the tax authorities' arguments in order to demolish or weaken them.
You will be able to develop these arguments in your observations and in your second observations following the tax authorities' reply.
If you do not submit these observations, the tax authorities will be only too happy! The procedure will be made much easier for them, and much quicker! If you submit these observations and they are solid, they will have to respond to you point by point. This will generally take them time and energy and may help make them "throw in the towel".
Next, numerous remedies are open to you; these remedies will have two advantages:
- At best, to break the tax authorities' position
- At worst, to buy you time: because as long as all the remedies pursued have not been concluded, the tax authorities cannot issue a demand for payment of the sums
OK, in practical terms, what actions can I take?
Submit solid observations within 30 days
These observations will address the tax authorities' position point by point, in order to dismantle each point one after the other on the basis of legal texts and supporting evidence.
The tax authorities are obliged to respond, with supporting arguments. This will consume time and energy.
Submit new solid observations within 30 days following the tax authorities' reply
Here again, once the tax authorities' reply has been received, we take up each of the arguments, which we try to break point by point with supporting texts.
Here again, the tax authorities are obliged to respond, with supporting arguments. This will once again consume time and energy.
The hierarchical appeal
We refer the matter to the auditor's superior (their manager) in order to force a meeting with him/her. During this meeting, we put forward our arguments to make our position prevail, or we try to reach an agreement…
This also lengthens the procedure; you gain time.
Referral to the departmental contact person (interlocuteur départemental)
Same idea, but going one level higher. We refer the matter to the auditor's "manager's manager". Here again, a new chance to hit the mark with our arguments, or to reach an agreement.
Here again, time is gained for you.
Referral to the Direct Taxes and Turnover Taxes Commission (commission des impôts directs et des taxes sur le chiffre d’affaires)
In certain cases (most cases), this commission may also be seized. It is chaired by an administrative judge and composed of representatives of taxpayers and of the tax authorities. A new chance to make our position prevail…
Referral to the Abuse of Law Committee (comité de l’abus de droit)
If the tax authorities accuse you of abuse of law, we can refer the matter to this committee in order to break the tax authorities' abuse-of-law accusations.
The formal tax claim (réclamation contentieuse)
Once the notices of assessment for collection (avis de mise en recouvrement) have been received, this makes it possible to challenge the tax authorities' arguments and give yourself a new chance of winning your case. This claim also allows us to request a stay of payment (sursis de paiement), meaning that the sums are not immediately payable, and the tax authorities cannot seize your accounts, freeze your accounts, etc… (guarantees may, however, be required where the disputed taxes exceed €4,500, and protective measures remain possible if sufficient guarantees are not provided). Your assets and your freedom to operate are thus, in principle, preserved.
What I wanted you to understand is that YOU TOO HAVE POWERS TO DEFEND YOURSELF.
BUT YOU STILL NEED TO KNOW THEM AND KNOW HOW TO USE THEM EFFECTIVELY.
Too many taxpayers get crushed during a tax audit because they were not assisted, or not properly assisted, and did not use all the means of defence available to them.
They played into the tax authorities' hands by putting forward non-legal arguments (or even arguments that actually harmed them) and by not triggering all the procedures within their reach.
This made things easier for the tax authorities, who were ultimately able to issue demands for payment quickly and "close the file" easily. The taxpayer generally comes out of it with an exorbitant "bill".
And it is only at that point, unfortunately, that they think they should contact a tax lawyer. But they have missed many chances, most of which are no longer open… their defence becomes much more complicated as a result.
IMPORTANT: all the actions listed above are so many procedural "banana skins" under the tax authorities' feet. If the tax authorities overlook one of the remedies requested by the taxpayer, the procedure may be annulled, which may lead to the reassessments being discharged.
