13. Tax Inspections in France
- 13.1 Levels of Control in France
- 13.2 Sanctions within France
- 13.3 Time Limits for Recovery
- 13.4 French Tax Claims
- 13.5 Determination of Tax Status in France
Whilst you may think that submission of your tax return is the end of the matter, it is not necessarily the case, as you may later be subject to a tax inspection by the authorities.
Last year over 50,000 taxpayers (business and individual) were subject to a tax inspection. The government recovered millions in underpaid taxes and fines!
In the main, the authorities prioritise investigation into business operations. Nevertheless, it is not unusual for an individual taxpayer to be asked for a written response to one or more queries concerning their tax return.
13.1. Levels of Control in France
There are three levels of control exercised by the tax authorities.
At the first level they will undertake verification that you have correctly completed the return and, if so, you will hear no more from them until your receive your tax notice. The is process is called le contrôle formel.
At a second level you may later receive a (recorded delivery) letter from them asking for clarification, or further details, often in the form of a questionnaire, which you will need to complete and return to them. This is process is called le contrôle sur pièces.
Thus, if there appears to be some inconsistency in the information provided on the tax declaration, or your circumstances have changed significantly from your last return, or you are seeking a tax concession, a demand for further information may be made.
If you are merely asked for further information to clarify you will be given 30 days in which to respond; if you are asked to provide documentary justiification you will be given two months.
It is important you reply within these timescales, failing which the tax authority can proceed to simply impose a tax charge upon you. You may also receive a fine. This procedure is known as taxation d’office.
Accordingly, make sure you keep all paperwork associated with your tax affairs in good order. You are required by law to keep them for a minimum of six years.
More often than not it is slight errors in the compilation of a tax return than can lead to the authorities digging deeper, so time and money spent ensuring your tax return is property completed is never wasted.
At a third level they will undertake a detailed investigation, (called la vérification approfondie) into your case, about which you will be specifically informed. These investigations are undertaken by a specialist branch of the tax authority called l'Inspection générale des Finances.
Their detailed investigation into the tax affairs of and individual taxpayer takes the form of an examen contradictoire de l'ensemble de la situation fiscale personnelle (ESFP), whilst that for a business and professionals a vérification de comptabilité.
The risk of such an investigation happening to an invidividual taxpayer is very low, despite the impression which may be given by tax advisors, or the tax authority themselves!
As a general rule the major focus of enquiry is on larger business operations (notably the recovery of underpaid VAT) and on those sectors where where cash payments are widely used, e.g. building sector, bars and restaurants.
However, if they so choose to do so, in investigating your circumstances the tentacles of the tax authority can be very long.
In business cases it is not unusual for the tax authority to seek judicial consent to make unannounced visits to premises, and to seize documentation and computer equipment.
One protection afforded to taxpayers in all of this is that, if the tax authority do undertake an investigation, once completed they cannot go back and reopen the case and the investigation is limited to one year.
Tax Avoidance Schemes
There is a health warning to be given over tax avoidance schemes and tax arrangements, which may be recommended to you by tax advisors, accountants or lawyers.
Even though the scheme may be strictly within the law, if the tax authority later judge it to have been divised merely to reduce liability to the payment of tax they can declare the scheme to be void.
If so, the scheme is called an abus de droit.
Notable schemes which have fallen foul of this general principle are those which try to get round the rigid French inheritance laws.
You could then be liable for payment of the arrears of tax and penalities.
The golden rule – by all means use advisors, but make sure all discussions with them are recorded in writing, and that letters are posted by recorded delivery, lettre recommandée avec accusé de réception.
13.2. Sanctions within France
If the tax authority decide you have underpaid your taxes then their response will depend on the gravity of the offence, as they see it. In particular, whether or not they judge it is an error or omission made in good or bad faith.
If it is minor (normally less than 5% of income declared), and if the return was judged to have been made in good faith, then will probably do no more than send a letter asking you to pay the outstanding sum, without penalty.
You would be asked to pay the outstanding sum within 30 days, and that would be the end of the matter.
If the offence is more serious they will open a recovery procedure called a une procédure de redressement.
When this procedure opens you will be sent a letter from the tax authority setting out their demand, to which you have 30 days to respond.
You could be liable to an interest charge of 0.40% per month (4.80% per year) on the underpaid tax.
More seriously, there is also a penalty of either 10%, 40% or 80% of the underpaid tax.
A penalty of 80% is only likely to be demanded where you have failed to pay, despite previous reminders to do so, or in the case of a clear act of bad faith.
In serious cases of manifest and blatant fraud, known flagrance fiscal, the tax authority may act immediately to seize effects and impose a fine of up to €10,000.
As a rule, this substantial power, introduced in 2007, is expected to be used only very rarely, and then only against business activities, where there is the risk that the ability of the tax authority to may not be able to recover unpaid taxes if it does not act immediately e.g. liquidation of business.
If the authority conclude that there is a case of serious and deliberate fraud, involving a significant sum of money, then, if you are found guilty, as well as a major fine, you are liable for up to 5 years imprisonment.
13.3. Time Limits for Recovery
As a general rule the tax authority can go back three years for the recovery of underpaid taxes.
So, for amounts due in 2007, the tax authority have until the end of 2010.
In the case of local taxes and rates the recovery period is one year.
If tax authority themselves make an error then they can recover underpaid tax for up to a further year following submission of tax return, which may be increased to a further two years in the case of inheritance tax or where there is evidence of fraud.
However, in all cases where there has been non declaration, in gift or inheritance tax cases, or where legal proceedings are taken, then the recovery period has recently been reduced from ten to six years for procedures arising after June 2008.
13.4. French Tax Claims
If you consider there is an error in your tax assessment you have two years in which to contest the assessment.
The process is called a reclamation.
So, for instance, in the case of your tax return for 2007 relating to income earned in 2006, you have until 31 December 2008 to make your submission.
This period is reduced to one year for local taxes. So for local taxes paid in 2006, you have until 31 Dec 07 to make a demand.
You need to submit your case to the Centre d’impôts whose address is shown on your tax notice.
The tax office have up to six months to reply, which may be extended for a further three months.
13.5. Determination of Tax Status in France
If you are unsure of your tax status or the tax status of a proposed transaction, there is a process called rescrit fiscal, in which the tax authority are formally required to declare their position on your cirumstances.
The procedure grants you exoneration from later sanctions by the tax authority.
Under the procedure you would need to write to your Centre d’impôts invoking the right of rescrit fiscal, and seeking a formal declaration from them.
The use of this procedure is particulary useful if your circumstances are complex, or you are a new business and you wish to make use of a tax saving scheme and you are not sure if it applies in your case.
Conversely, you also risk attracting the interest of the tax authority on your affairs, so it is not a procedure to be used if you like your privacy!
If the tax authority do not reply within six months they are deemed granted acceptance and you are later relieved of any contrary action against you.
Next: French Tax Complaints System
Finance & Taxation