Each year the French tax authority recovers billions in unpaid taxes, totalling last year no less than €10.6 billion.

It is a staggering figure, and one about which the government makes a great deal.

Nevertheless, less reported was the fact that the overwhelming majority of unpaid taxes were business taxes, including those from companies abroad. As well as income tax, other unpaid taxes recovered included wealth tax, local taxes, VAT and customs duties.

Moreover, most of the unpaid taxes are recovered, not as the result of fraud investigations, but the routine process of correction to errors made in a declaration.

In practice, the chances that an average household will have a tax inspection are slim. Whilst each year hundreds of thousands of tax returns will have a document check in the tax offices, only several thousand, mainly well-heeled households, will be subject to a detailed tax inspection. The number of such investigations has in fact declined in recent years, in order that the tax authority can focus on the most important cases, including those where criminal activity is suspected.

The late submission of a tax return is very often the first red light for the tax authority, as is an undeclared bank account.

Other factors that may attract the attention of the tax authority are:

• Substantial variations income between one year and another;
• Inconsistencies between declarations made by the individual, particularly with those declarations made to URSSAF, the social security collections agency, by business owners;
• Information received from banks in France, as well as from similar automatic exchanges that take place on an international basis;
• The check may also arise from a third-party report of fraud or tax avoidance;
• A change of circumstances declared on a tax return, such as divorce or marriage;
• Taxpayers who exploit tax advantages may also attract their attention.

So what are the main tax control processes in place?

A verification of the tax return and other declarations made is called a contrôle sur pièces.

In the process, the tax authority is normally content to analyse the documents in its possession. No mandatory meeting normally takes place and, in general, the taxpayer is not even informed of the check. However, where necessary, the tax authority will request submission of relevant documents, such as bank statements.

In the case of income tax, the check allows the tax authority to verify that the overall income declared is consistent with previous declarations and with information it has in its possession.

The tax authority has the right to correct errors, inaccuracies, or omissions in the returns filed. It also has the option of sending the taxpayer a proposal for rectification if breaches have been observed. An appeal procedure exists in the event of notification of a proposed correction.

At the end of a document check, the tax authorities close the case file, after having found that everything is in order. This decision is not notified to the taxpayer.

A formal, comprehensive, adversarial examination of the personal tax situation is called L’examen contradictoire de la situation fiscale personnelle (ESFP). The audit is undertaken by specialist staff in the tax offices, who should not be underestimated.

There are detailed procedures in place for an ESFP and if there are breaches of the procedure by the tax authority this renders the tax charged to the taxpayer irregular.

The ESFP generally takes place on the premises of the tax authority, although it may take place at the taxpayer's lawyer's office, or at the taxpayer's home if he or she so requests.

The tax office can demand access to any document it wishes.

An individual who is the subject of an ESFP will receive an audit notice which mentions the years that are going to be audited and of the possibility of being assisted by a counsel of their choice (usually a lawyer).

The tax authority must also provide their charter of rights and obligations, failing which the audit procedure will be null and void.

An ESFP is limited in time and cannot in principle extend more than one year, although up to 2 years in the event of an undisclosed activity.

The tax recovery period is also limited in time, which is until the end of the third year following the year in respect of which the tax is due.

For example, if an individual (or household) is audited in 2025, the tax authority can exercise their right of recovery on the income declared for the years 2022 to 2024. In the case of wealth tax (IFI), in the absence of a declaration, the recovery period is 6 years.

In addition, insofar as the ESFP is adversarial in nature, the tax authority is obliged to engage in a discussion with the taxpayer on the disputed points for which a tax adjustment is envisaged.

Once completed they may not carry out a new audit for the same period and the same tax in the future.

A taxpayer has 30 days to respond (60 days if he or she requests it), to which the tax authority has 60 days to respond.

It is also possible to file an administrative appeal, within time limits. There is also a right of appeal to a quasi-judicial body, but their opinion is only advisory, and their areas of expertise are limited to business income.

In certain circumstances the tax authority can implement an ex-officio taxation procedure, when the adversarial rectification procedure does not apply.

The main consequence of an ex-officio tax control is that the burden of proof lies with the taxpayer, not with the tax authority, as is the case with the ESFP.

Normally, such a control will only occur following non-submission of a tax return and the individual has not regularised the situation within 30 days of a formal notice.

It also applies when the taxpayer has not responded within 60 days to a request for clarification or justification.

In the event of a correction following an audit, late payment interest at the rate of 0.20% per month applies and is added to any surcharges and fines notified.

If the tax authority finds a deliberate breach they can impose a penalty of 40% of the duties evaded, which can be increased to 80% in the event of a fraudulent activity. In the most serious cases, the tax authority can initiate criminal proceedings.

For a delay in filing the tax return, an increase at the rate of 10% applies. This penalty increases to 40% if the return has not been filed within 30 days of a formal notice. It can also be increased to 80% in the event of an undisclosed activity.

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