The aim here is to present the full tax audit procedure that may lead to action by the French Tax Authorities (FTA) to adjust and recover tax: from the notification of inspection to the referral to the administrative or ordinary courts.
Limitation period/recovery period
The recovery period is the time limit permitted to the FTA to modify the taxation established in the name of the taxpayer.
Upon expiry of this period, action by the tax administration is "time-barred", i.e. the FTA may no longer make any claim for adjustment that would alter the sums payable by the taxpayer.
The recovery period depends on the nature of the tax that the FTA intend to adjust.
In concrete terms, the FTA have the following time periods in which to challenge tax amounts that have previously been determined
- Corporation Tax (CT), Income Tax (IT)
- N+10 in the case of concealed or illicit activity or where an account is held abroad
- 31/12/N+3 (with reference to the closing date of the financial year)
- extended in the event of criminal proceedings
- Wealth tax, registration fees (land registry tax, inheritance/gift taxes)
- 31/12 N+6
- 31/12 N+3 if the deed sent spontaneously to the FTA (registered deed or declaration) permits an inspection without additional research
- 31/12 N+10 where accounts are held abroad
If a commitment is not met (resale, building, etc.) the recovery period will only start to run at the end of such commitment!
- Business rates (Contribution Economique Territoriale, CET) (Cotisation Foncière des Entreprises, CFE and Cotisation sur la Valeur Ajoutée des Entreprises, CVAE)
- 31/12 N+3 with N+10 in the case of concealed or illicit activity
- Land tax, dwelling tax
- 31/12 N+1
If a declaration is incomplete (in particular in the event of a change in the nature of buildings) the adjustment will be multiplied by the number of incomplete years, up to a maximum of 4 years!
→the recovery period for the tax administration may not exceed 10 years!
Upon expiry of these deadlines, any action on the part of the tax administration is normally time-barred, unless it has been interrupted.
In the event of interruption, however, a new deadline will be set as from the interruption according to the amounts adjusted.
In practice, time-barring is interrupted by
- notification by the tax administration of a proposal for adjustment,
- any deed acknowledging their debt by the debtors,
- any interruptive act under ordinary law (action at law, distraint, etc.).
Notification of inspection
The notification of inspection is the procedural document telling the taxpayer of an imminent inspection of the accounts. Notification must be given by the FTA or the procedure is null and void.
The notification of inspection must also contain certain legal statements or be deemed null and void.
These primarily concern:
- the periods subject to inspection,
- the possibility of consulting the taxpayer's charter online, and
- the option of seeking assistance from an adviser of the taxpayer's choice.
In practice, the notification of inspection also
- contains a proposed date for an appointment,
- indicates the taxes and periods concerned by the inspection, and
- gives the name of the senior inspector and his/her direct superior: the departmental supervisor.
Lastly, the FTA must grant a reasonable delay between receipt of the notification of inspection and the first action of the inspector handling the case so as to permit the taxpayer to organise any defence.
Inspection: procedure and methods
The inspection of the accounts is generally conducted at the registered offices of the company being inspected. However, the taxpayer may on request obtain permission from the FTA to hold the inspection at the offices of its adviser (accountant, lawyer, asset/property manager).
The first visit by the inspector will largely consist of a simple presentation of the company's premises and business.
The inspector may then visit weekly (or less frequently). Whatever the outcome, an inspection on the premises must be verbally discussed by both parties.
♦ Inspection methods
An inspection of the accounts will of necessity be conducted on the premises.
Since 2014, any enterprise that has a computerised accounts system may, in the event of an inspection, submit to the FTA a computer record of its accounts (the "single file") with all the data likely to affect these. If this file of the accounting records is not submitted, the company will be subject to an automatic taxation procedure (no appeal to departmental commission possible).
Since 1 January 2017 the tax authorities have been able to initiate remote "accounts examinations". This inspection procedure is distinct from the inspection of the accounts and obliges the company to submit a file of accounting records (Fichier des Ecritures Comptables, FEC) within 15 days of receipt of notification of an accounts examination.
♦ Duration of the inspection
The duration of an accounts inspection depends on the turnover of the company being inspected.
For SMEs (turnover ≤ €783,000 for sales activities; turnover ≤ €236,000 for services supplied; turnover €350,000 for agricultural activities) the inspection may not exceed three months.
For other companies, i.e. those whose turnover exceeds the above thresholds, there is no limit provided the inspector observes a "reasonable" time, in general 3 to 6 months.
♦ What to do in the event of a tax audit?
Receipt of a notification of inspection necessitates a pre-audit before the inspection in order to identify points requiring attention.
The arrival of the inspector will also require preparation, as he/she must have easy access to all of the accounts and other supporting documentation (contracts, invoices, etc.).
In order to ensure consistency in monitoring the inspection, it is advisable to appoint just one contact person (e.g. head accountant, finance director).
♦ Upon conclusion of the inspection
It is vital to hold a summary meeting in order to draw up a list of the points that are likely to be subject to adjustment. This important meeting may also be the opportunity for an adviser to intervene as necessary.
The sooner an adjustment is contested, the greater the chances of the company obtaining its cancellation without the need for litigation!
Proposal for adjustment
The proposal for adjustment, previously the "notification of adjustment", marks the end of the inspection procedure and halts the limitation period.
It must be sent not only to the taxpayer as the person legally owing the tax, but also to all third parties potentially impacted by such proposal. These may for example be the partners where the proposal for adjustment is sent to a partnership.
The proposal must be sent by registered letter with acknowledgment of receipt, or handed personally to the interested parties.
The proposal for adjustment:
- lists the proposed adjustments,
- present the facts, the law and the grounds for the adjustments,
- sets out the tax payable, as well as any late-payment interest (4.80% per annum) or penalties (0%, 5% or 10% according to case).
→ The penalties may total 40% for deliberate errors or 80% in cases of abuse of the law!
The proposal for adjustment entitles the taxpayer to respond and make Observations within 30 days; this period may be extended by a further 30 days.
The taxpayer may:
- accept the adjustments point by point,
- dispute them, justifying its observations in fact and in law.
Observations on the part of the taxpayer
Following the Observations made by the taxpayer, the taxpayer may appeal to a higher level and thus meet the inspector and his/her direct superior.
In the event of disagreement with the superior, the taxpayer may meet the departmental supervisor.
This person is superior to the senior inspector and has not monitored the inspection, but is part of the inspectorate.
While such appeals are optional, they are important as some adjustments made by the FTA are for negotiation, particularly as regards issues of fact
Response to the taxpayer's Observations
If the taxpayer contests the adjustments, the FTA will issue a response to the taxpayer's Observations, in general within a period of 1 to 6 months as from the Observations. This permits the FTA to reformulate the financial consequences as they see fit and propose to the taxpayer that the matter be referred to the departmental commissioners where these have the necessary competence.
Referral to the departmental Commissions
There are 2 types of departmental commissions
- the Commission des Impôts directs et Taxes sur le Chiffre d'affaires, who may only assess issues of fact regarding direct taxes and turnover taxes, and
- the Commission de Conciliation, who values shares in property companies or real estate assets.
The departmental commissions are joint bodies made up of an equal number of representatives of FTA and of the taxpayer, chaired by a magistrate from the administrative branch. Following deliberation (4-8 months as a whole) the Commission will give its opinion which, while not binding, is generally accepted by the FTA.
Applications must be made to the Commission by the taxpayer within a period of 30 days following the response to the taxpayer's observations.
The Commission secretariat will send the taxpayer the report drawn up by the FTA one month before the hearing; the taxpayer may then make fresh Observations and send them to the Commission.
The taxpayer may, with its adviser, make verbal observations on the day of the hearing.
Upon conclusion of these exchanges with the taxpayer, and if the adjustments are in whole or in part upheld, the FTA will issue a notice of recovery (Avis de Mise En Recouvrement, AMR) setting out the amount of tax owed by the taxpayer.
Before petitioning the court that deals with tax matters, the taxpayer – if still in dispute with the FTA – must first submit a contentious claim to the FTA, more usually known as "pre-litigation proceedings".
The actual response of the FTA to the preliminary claim will ultimately be disputed before the courts within a period of 2 months. If the FTA does not respond, the court may be petitioned within a period of up to 6 months.
However, even if the taxpayer still intends to dispute the legitimacy of the tax bill before the courts, it is still obliged to make payment of the tax upon receipt of the notice of recovery: the taxpayer may nevertheless request a deferment of payment to be granted, provided a surety is offered and accepted by the FTA.
♦ Disputes dealt with in the first instance
The Administrative Court (Tribunal Administratif, TA) has competence for tax disputes relating to CT, IT, VAT, business rates and other local taxes.
The Court of First Instance (Tribunal de Grande Instance, TGI) has competence for wealth tax, inheritance/gift taxes and registration fees.
The appointment of counsel, although advisable for matters of first instance, is not obligatory.
Disputes in the first instance may last from 1 to 5 years, depending on the court petitioned.
♦ Disputes going to appeal
In the event of an unfavourable decision from the court of first instance, the taxpayer may appeal against the decision (except in the case of certain local taxes).
Counsel is obligatory when appearing before the Administrative Court of Appeal or the Court of Appeal, with the case being entirely reviewed on its merits.
Such proceedings may last from 1½ to 3 years.
♦ Cassation proceedings
Counsel is necessary for such proceedings and discussion is limited to the conformity with the law of the ruling relating to the appeal: it will not relate to the merits of the case.
An appeal to the Court of Cassation is likely to last between 1 and 3 years.