A tax audit, whether for a business or an individual, is a significant event that can have far-reaching consequences for a company, person, or family. The duration and impact of a tax audit can be short or extend over several years.
In most cases, unless the situation escalates to litigation, it is possible to defend oneself during an audit. However, the imbalance of power, technical complexities, and the established practices of the tax administration mean that multiple factors must be carefully managed.
The French tax law firm CM-Tax, with offices in Lyon and Marseille and serving both French and international clients, often assists members of the global community in France and offers insight into a typical tax audit.
For individuals, if income is primarily composed of wages automatically reported by an employer, the likelihood of an audit is low, particularly with the introduction of pay-as-you-earn tax collection. However, errors or discrepancies, such as deductions for real expenses (which increase the likelihood of a tax audit), child support payments, or claiming tax credits, can trigger a review.
Those most vulnerable to personal tax audits are taxpayers with less easily identifiable income sources or those who claim significant deductions, such as landlords using depreciation allowances for furnished rentals or deductions for property maintenance in unfurnished rentals.
Taxpayers with foreign income, foreign bank accounts, or those who own foreign companies are particularly at risk of audits, especially if they have failed to declare these to the French tax authorities. This is heightened by the automatic exchange of financial information between countries.
In addition, the tax authorities closely monitor significant financial transactions, such as the sale of businesses or shares in private companies, as well as inheritance or donation transfers under the advantageous Dutreil Pact, and compliance when selling shares to a holding company.
Any business, regardless of size or legal structure, can be subject to a tax audit.
An audit may review all the taxes and transactions of a company (e.g., VAT, corporate tax, local taxes, and research tax credits), or it may focus on a specific tax or operation (e.g., VAT or loss carryforwards).
There are several types of audits:
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Documentary audit: This is conducted remotely by the tax authorities without prior notice, based solely on the documents in their possession. The response provided by the taxpayer is crucial, as it’s important to anticipate the administration’s expectations and the potential consequences of the audit.
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On-site audit: For businesses, this is a tax audit involving the company’s accounting, while for individuals, it’s a review of their personal tax situation. This process involves the tax authorities visiting the business or individual, though it can be requested that the audit take place at the tax office, where follow-up meetings can be scheduled.
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Remote accounting audit: This is an intermediate form of audit for businesses, focusing on specific points. It’s conducted remotely, and a physical meeting may only take place after the audit concludes.
Each type of audit is subject to different procedural rules, and taxpayer rights vary depending on the audit type.
A tax audit is rarely random. While some businesses, due to their size or sector, may face regular audits, or years may pass since the last review, many audits result in tax reassessments.
For this reason, it is wise to seek the help of a tax lawyer before or as soon as a reassessment notice is received. This initiates a phase of negotiation and discussion with the tax authorities.
In some cases, after the audit concludes but before any additional taxes are collected, a tax commission, composed of tax officials, taxpayer representatives, and chaired by a magistrate, can be called upon to give an opinion on the reassessments.
Although the commission's opinion is purely advisory and not binding on the tax authorities, it carries weight. The tax authorities typically follow it, and it can have procedural consequences if the matter escalates to litigation.
Founded in 2007, CM-Tax is a firm of French tax lawyers based in Lyon and Marseille that provides national coverage. We are ready to assist and defend your interests at every stage of a tax audit
