Every year, the tax authorities audit a very large number of taxpayer files. Private individuals may be subject to these audits in various ways: a desk audit (contrôle sur pièces) carried out by an inspector from his office through a simple analysis of the taxpayer's returns and of their consistency with the other information known to the tax authorities; or an in-depth audit in the form of an in-depth examination of personal tax situation (examen de situation fiscale personnelle) (ESFP) of the taxpayer (individual), which may cover all of his income and assets.
Companies, for their part, may be subject to a desk audit, or to more thorough audits such as a remote examination of accounts (examen de comptabilité) or, more thorough still, an on-site audit of accounts (vérification de comptabilité). In each of these procedures, our tax law firm can assist you.
Which factors are likely to attract the attention of the tax authorities?
What are the main factors that trigger a tax audit ?
How can tax audits be avoided?
"High-stakes" taxpayer files
Private individuals
A tax audit is, in principle, carried out systematically every 3 years for taxpayers:
With income exceeding €20,000 / month. This threshold may change and be slightly lowered or slightly raised depending on the location of the tax office (in "wealthier" départements the threshold will be slightly higher, in less "wealthy" départements it will be slightly lower).
With gross real estate assets subject to the real estate wealth tax (impôt sur la fortune immobilière, IFI) of more than €3.9 million
Companies
Companies are more likely to undergo a tax audit than private individuals. Certain sectors are more affected by these audits by the tax authorities:
Textiles,
Restaurants and catering,
Construction,
Businesses that frequently receive cash payments: hairdressers, taxis, etc.
Private hire vehicle (VTC) companies
Companies that provide staff from abroad to work in France (foreign IT services companies, etc.; the tax authorities will look for the presence in France of a "permanent establishment")
Audited companies generally show tax anomalies detected during a desk audit (remote review):
Significant variations in the accounts,
Margins that are too low or too high,
Substantial benefits in kind,
Restructuring operations: mergers, demergers, takeovers, etc.
Local or national directives from the tax directorates
Directives are sent to inspectors instructing them to carry out more thorough audits of a given business sector or a particular profession during a given year.
Their audits are then more or less targeted, focusing, for example, more specifically on the research tax credit (crédit d'impôt recherche), or on companies with suppliers based in certain States, or on many other specific cases that will ideally require the involvement of your tax lawyer.
External sources of information
To ensure the reliability of the returns filed, officers of the Directorate General of Public Finances (Direction générale des Finances publiques, DGFIP) rely on various external sources of information:
URSSAF (social security contributions collection agency),
Social security bodies,
Banks and financial institutions,
Foreign administrations with which automatic exchanges have been set up or through reciprocal administrative assistance agreements,
Extracts from notarial deeds or taxpayers' declarations (gifts, inheritances, real estate acquisitions, etc.),
Etc.
The audit of a third party
When a company is audited, the information obtained during that audit may prompt the tax authorities to audit a subcontractor, a principal, suppliers, customers, etc. Likewise, certain aspects of private life may catch the attention of the tax authorities and trigger an audit:
A major purchase paid in cash from a trader who is subject to a tax audit,
Taking out an insurance policy following the purchase of goods in cash: if the value of these goods exceeds €15,000, your insurer will generally inform the tax authorities,
A real estate acquisition with little or no borrowing, while the official income declared is low
Subscribing to shares in or setting up a company with substantial capital, with little or no borrowing, while the official income declared is low
In fact, any significant disproportion between lifestyle in the broad sense and official income.
Incomplete or missing returns
Failure to file a return, incomplete information in the return, suddenly starting to file after failing to do so for some time, or late filing may trigger a tax audit, which could very often have been easily avoided by consulting a tax lawyer beforehand.
Denunciation through a "tax informant" (aviseur fiscal)
A source of information used with caution by the tax authorities, denunciation may give rise to a tax audit. In such cases, tax officers are in principle careful to verify the reliability of the information provided by the informant. However, since April 2017, a milestone has been reached, as the status of tax informant is now officially recognised. The Finance Law authorised the tax authorities to offer compensation to any person who provides them with information making it possible to uncover, in particular, the existence of one of the following fraudulent practices:
Breaches of the rules concerning tax domicile in France
International tax evasion
Failure to declare bank accounts, trusts and capitalisation contracts held abroad
Changes in situation
The attention of DGFIP officers may be drawn by significant changes in situation:
Significant variations in assets or income,
Large capital gains, particularly in connection with the sale of a business,
A large inheritance,
Children being attached to the tax household,
Maintenance payments, benefits in kind, compensatory allowances (prestations compensatoires), etc.
Etc.
Unusual bank transactions
In the event of unusual transactions on a bank account involving substantial sums (over €10,000), it is preferable to keep your bank informed and to justify the nature of these cash flows. Banks are indeed very likely to alert the tax authorities if they have any doubts about the proper use of a bank account.
The same applies when large and repeated cash deposits are made into your account, or in the event of repeated transfers sent to or received from abroad.
Reductions in the tax base
This is the case, in particular, with tax reductions or tax credits, or allowances.
For example, the financing of energy renovation work (installation of a high-efficiency boiler, etc.) may be partly covered by public aid (MaPrimeRénov', which in 2021 replaced the energy transition tax credit (crédit d'impôt pour la transition énergétique)): this situation therefore quite often triggers a request for supporting documents. It is therefore advisable to check carefully the conditions for applying these tax benefits and to keep the supporting invoices that gave entitlement to a tax credit.
Another trigger: taking out a tax-efficient investment. The larger the tax credit, the more likely an audit becomes.
Real estate
Real estate is scrutinised closely by the tax authorities, in particular in four specific cases:
The acquisition of a property with little or no borrowing, while the taxpayer's official income is low in proportion to the purchase price of the property
Holiday rentals: particularly following the development of Airbnb, many taxpayers can earn additional income by occasionally renting out their properties. They are increasingly in the sights of the tax authorities.
Real estate transactions: any significant difference between the value on transfer or sale and the value declared for IFI purposes is likely to attract the attention of DGFIP officers.
Depreciation (possible only in certain specific cases): this is the accounting expression of the theoretical loss in value of an asset over the years. Indeed, taxation takes "wear and tear" into account (more precisely and technically, the consumption of future economic benefits, a much less intelligible phrase…) . However, only the building – not the land – qualifies for this tax benefit. The tax authorities may therefore check that the depreciation has not been artificially inflated by the taxpayer by overvaluing the building and undervaluing the land.
Conclusion
The grounds for triggering an audit are wide-ranging.
It is strongly advisable to react quickly as soon as the first letter is received.
Our tax law firm can assist you.
