What happens during a tax audit in France? Part 1: the audit itself, as seen by a French tax lawyer

A business or personal tax audit is a very important event, likely to have many repercussions in the life of a business, an individual or a family. Its duration and consequences may be brief or, on the contrary, spread over several years.

Except in the case of advanced litigation, it is possible to try to defend oneself against the tax authorities. However, the inequality of arms, the technical complexity of the subject and the existence of practices as in any activity mean that many parameters need to be mastered.

The French tax law firm CM-Tax, which has offices in Lyon and Marseille and works throughout France for both French and foreign clients, and usually assists members of the internotional community in France, can give you an overview of a typical tax audit.

For an individual, if the income relates solely to wages automatically declared by the employer, the likelihood of a tax audit is low since the introduction of the deduction at source, except in the case of errors, negligence or irregularities concerning, for example, expenses deducted from wages (the deduction of actual expenses significantly increases the likelihood of a tax audit) or from overall income (maintenance paid to children or parents, for example), or giving entitlement to tax reductions or credits.

Individual taxpayers who are most likely to face a tax audit are those whose income is more difficult to detect and who sometimes make large deductions (e.g. furnished rentals and deduction of depreciation, bare rentals and deduction of works).

Taxpayers with income from foreign sources and with foreign bank accounts or holding foreign legal entities are also particularly vulnerable to tax audits, especially if they have not been declared to the tax authorities, who are aware of them under the automatic exchange of information between countries.

Finally, the tax authorities also pay particular attention to exceptional transactions with significant financial implications. Examples include the sale of businesses or shares in unlisted companies, transfers by gift or inheritance under the highly advantageous Dutreil pact, and compliance with obligations in the event of the transfer of shares to a holding company.

All companies ans businesses are liable to be controlled, whatever their size or legal status.

The audit may cover all the company's taxes and transactions (VAT, corporation tax, local taxes, research tax credit) or, on the other hand, it may focus on a specific tax (VAT), transaction or system (e.g. audit of previous tax losses offset against profits, audit of balance sheet provisions only).

The first form of tax audit is the "documentary audit", which is carried out by the tax authorities remotely, without any prior information, on the basis of the documents in their possession. The nature of the response is very important, as it is important to anticipate the administration's expectations and try to determine the potential consequences.

The second form of tax audit is the accounting audit for companies and the contradictory examination of the personal tax situation for individuals, which involve the tax authorities visiting the company and the individual taxpayer, although it may be requested that the audit takes place at the administration's premises, where appointments are then made.

In the case of companies, an intermediate form of tax audit exists: this is the "accounting examination", which focuses on one or more specific points and is carried out remotely; a physical meeting is only possible at the end of the audit.

These different types of audit are subject to different procedural rules, and taxpayers' rights are not the same.

A tax audit rarely happens by chance, and even if certain companies, because of their size or sector of activity, are subject to a tax audit on a regular basis, or if many years have passed since the last audit, it is common for the audit to result in a reassessment.

This is why the assistance of a tax lawyer is useful upstream or, failing that, as soon as you receive a proposed adjustment, which opens a phase of response and discussion with the tax authorities.

In some cases, once the tax audit has been completed but before any additional taxes are levied, a tax commission made up of members of the tax authorities and taxpayers' representatives, and chaired by a magistrate, may be asked to give an opinion on the adjustments made.

The commission's opinion is purely advisory and is not binding on the tax authorities, who are free to follow it or not. However, it is extremely important because, on the one hand, it is usually - but not always - followed by the tax authorities and, on the other hand, it may have certain procedural consequences in the event of a dispute.


CM-Tax, a firm of French tax lawyers set up in 2007 with offices in Lyon and Marseille and working throughout France, can assist you and defend your interests at every stage of a tax audit.