In France, each taxpayer is responsible for filing their tax return on their own initiative.
From a legal standpoint, tax fraud refers to illegally removing part or all of one's taxable base from the scope of tax legislation. In other words, the fraudster evades tax or pays less than they should by resorting to illegal methods.
What is the difference between tax fraud and tax avoidance? How can you be certain not to make an omission amounting to tax fraud? What factors may give rise to a suspicious activity report for tax fraud? What penalties and sanctions does the fraudster face? Discover the complete guide written by our tax law firm on the practices that constitute tax fraud and on the applicable tax and criminal penalties.
Tax fraud: legal definition
In the eyes of the law, various types of conduct may constitute tax fraud:
- Total failure to file a tax return
- Inaccuracy or omission in the tax return: concealment of income or assets
- Use of illegal schemes in order to evade all or part of the tax due
- Deliberately organising one's insolvency in order to escape taxes
- Laundering of tax fraud proceeds: reintroducing the sums evaded from tax into the legal economy, for example by opening a bank account abroad
Taxable income, non-taxable income, deductions, …
Are you afraid of making a mistake when filing your taxes? If in doubt, any taxpayer may ask the tax authorities to take a position on their rights with regard to taxation.
A tax ruling (rescrit fiscal) is the procedure of asking the tax authorities how a tax provision applies to a given situation. The request may concern any type of tax or levy set out in the French General Tax Code (Code général des impôts, CGI): income tax, real estate wealth tax, VAT, local taxes, entitlement to a reduction or relief, …
Tax fraud and tax avoidance: the difference
The notion of tax fraud should not be confused with that of tax avoidance. The latter is a practice that consists in reducing or circumventing a tax by making use of loopholes or opportunities offered by the body of tax rules. To do so, the taxpayer may in particular:
- Have their profits or assets taxed in another country
- Use tax loopholes and incentives
Unlike tax fraud, tax avoidance is therefore not an illegal practice.
The suspicious activity report for tax fraud
Various professionals (chartered accountants, banks, insurers…) may file a suspicious activity report for tax fraud based on criteria such as:
- The use of a shell company whose registered office is located in a State that has not concluded a tax treaty with France
- The receipt of large sums in cash
- The receipt of large sums from abroad
- The carrying out of several financial transactions that are visibly inconsistent
- The detection of various anomalies in purchase orders or invoices submitted as supporting documents for financial transactions (missing address, dates, SIREN or registration number, …)
- Transfers of international funds without any economic or legal justification
- Refusal to provide supporting documents on the origin of funds received,
Etc…
Late-payment interest
When the tax authorities discover that fraud has resulted in the payment of a lower amount of tax than was normally due, they may apply late-payment interest. This amounts to 0.20% per month of the amount of tax evaded (0.40% before 2018). However, since August 2018, the law on the right to make mistakes (droit à l'erreur) allows this interest to be reduced by 50% in the event of voluntary regularisation by a taxpayer acting in good faith.
Tax penalties
In the event of tax fraud, various tax penalties apply depending on the nature of the fraud:
Late filing or failure to file: a surcharge on the tax of 10% for a late but voluntary return, also 10% when the return is filed within 30 days of the formal notice, and 40% in the event of failure to file 30 days after the formal notice (mise en demeure), which a tax lawyer can help you avoid by responding effectively and on time.
Concealment of taxable assets or income: a surcharge on the tax: no surcharge (only late-payment interest is due) if the taxpayer acted in good faith, 40% in the case of deliberate concealment, and 80% in the case of abuse of law or fraudulent schemes (manœuvres frauduleuses).
Service provided by a financial, accounting or legal advisory professional for the purpose of a fraudulent scheme: a fine equal to 50% of the income derived from the service provided to carry out the fraud.
Criminal penalties
When a taxpayer is guilty of tax fraud, the authorities may also bring criminal proceedings against them. The offender may be prosecuted for a period of 6 years following the day on which the fraud was committed. Depending on the case, the taxpayer at fault may be sentenced:
- To a fine of €500,000 and 5 years' imprisonment: when the fraudster acts alone
- To a fine of €3,000,000 (or twice the proceeds of the offence) and 7 years' imprisonment: when the fraud was committed by an organised gang or when it involved the use of false documents, a false identity, a bank account abroad or a false domicile abroad. If the perpetrator of the fraud, having alerted the administrative or judicial authority, makes it possible to put an end to the offence or to identify accomplices, the prison sentence incurred is halved.
International tax fraud: reporting and detection
Reporting of fraud: since April 2017, the authorities may pay a reward to a person who has reported international tax fraud, provided that the report leads to the discovery of a serious tax breach or fraud on an international scale. This procedure, introduced on an experimental basis, has since been extended in time, broadened (in particular to certain VAT breaches) and then made permanent by the 2024 Finance Act (Article L. 10-0 AC of the Tax Procedure Code (Livre des procédures fiscales, LPF)). Lawyers are not concerned: they are strictly prohibited from disclosing any information about their clients, as professional secrecy is very strict in this profession.
Detection of fraud: in force since the end of September 2017, the automatic exchange of bank account information enables the government to detect fraudulent practices on an international scale. In addition, since November 2017, the DGFIP (Direction générale des finances publiques, the French public finances directorate) has been able to use software specifically designed to detect tax fraud. This use is being carried out on an experimental basis for 2 years.
