A company director receives notice of a personal tax audit. During the year under review, he sold a flat, was repaid the balance of his shareholder current account, received a loan from his father and realised a capital gain. His accounts saw almost three times his declared income pass through them. He concealed nothing. He does not yet know it, but the question will not be whether he committed fraud. It will be whether he can prove, item by item, the origin of every sum.
The examen contradictoire de situation fiscale personnelle (ESFP), the French personal tax audit provided for in article L. 12 of the Code of Tax Procedure, is the most intrusive review the French tax authorities can bring against an individual. It does not target a single return, but a consistency: the one that must exist between declared income and the household's cash position, its assets and its lifestyle.
It applies to any individual liable to income tax in France, whether or not resident there.
Because the audit is not triggered by a suspicion of fraud, but by an arithmetical gap.
Article L. 16 of the Code of Tax Procedure allows the French tax authorities to request justifications where they have gathered material tending to show that the taxpayer may have larger income than declared, in particular where the total of the amounts credited to his accounts represents at least twice his declared income, or exceeds it by at least 150,000 euros.
Two points change the reach of this provision.
The two thresholds are alternative. Crossing either one is enough.
And they are given only by way of example. The words "in particular" mean that the French tax authorities may request justifications without any threshold being reached, provided they have gathered other material. To believe oneself safe because one stays below the doubling figure is an error of analysis.
Now, credits to a bank account are not income. A property sale, the repayment of a current account, a family loan, a transfer between one's own accounts, a gift: none of these is taxable, and every one of them swells the total of the credits. A wholly compliant director therefore crosses the threshold about one year in five, without having done anything out of the ordinary.
More than the taxpayer imagines.
Since 2023, the French tax authorities have been able to obtain account statements directly from the banks, without going through the taxpayer. They therefore hold, before any exchange, the detail of the movements.
Their reach is wide. They examine the accounts of every member of the tax household, accounts held abroad, mixed accounts, and accounts over which the taxpayer merely holds a power of attorney. The account of an elderly parent, or of a family company, falls within the perimeter.
The first meeting is therefore not a moment of discovery for the auditor. It is a moment of verification. The questions asked bear on sums already identified, and the way they are answered is recorded in a written note.
It is the central instrument of the procedure, and the taxpayer usually discovers its existence when it is used against him.
For each year under review, the auditor reconstructs the household's known resources on one side, and all its uses and expenditure on the other. Where the uses exceed the resources, the gap calls for an explanation.
That gap is not proof of concealment. It is a factual presumption, built from banking data, tax returns, notarised deeds and lifestyle indicators. It may rest on a mis-dated expense, an omitted resource, a flow counted twice. It can be disputed, and it must be disputed during the audit, not afterwards.
This is where the procedure tips over, and most taxpayers do not measure it.
A request for clarification or justification based on article L. 16 is not a mere request for information. It is binding. The taxpayer has a period which may not be less than two months. If his answer is judged insufficient, the French tax authorities serve a formal notice to complete it within thirty days, specifying what they expect.
Failing any answer, or where the answer remains insufficient after that notice, the French tax authorities proceed to an arbitrary assessment on the basis of article L. 69 of the Code of Tax Procedure. The unjustified sums are then taxed within the overall income as income of undetermined origin.
An imprecise answer, an unsupported assertion, a document that does not prove what it is meant to prove, all produce the same effect as silence.
The burden of proof.
Under the ordinary adversarial procedure, it falls to the French tax authorities to establish that the reassessment is well founded. Under an arbitrary assessment, the logic reverses: it is for the taxpayer to demonstrate that the tax charged is excessive, before the court, years later, on facts he did not document at the time.
In other words, the case is not lost before the court. It is lost at the moment an insufficient answer is sent to the auditor. Everything that follows merely records that loss.
This is why the two months following a request under article L. 16 are the most decisive period of the whole procedure.
They are substantial, and their breach by the French tax authorities leads to the discharge of the tax.
The audit may not extend over a period exceeding one year, counted from receipt of the notice to the sending of the notice of proposed adjustment. That period is extended in several situations, in particular by any additional time granted to the taxpayer to reply, by the time the authorities need to obtain statements from the banks, or by recourse to international administrative assistance.
The procedure must open with a formal notice, which states the years under review and informs the taxpayer of his right to be assisted by the adviser of his choice. The charter of the audited taxpayer's rights and obligations is binding on the authorities. A genuine oral and adversarial discussion must take place, and its absence renders the procedure irregular.
These safeguards are worthless if they are not invoked in good time. An irregular extension, an adversarial discussion that never took place, an omitted formal notice: these are grounds for discharge, and they are established during the audit, not on reviewing the file once it is closed.
It will not tell you how to justify the origin of a transfer received three years ago. It will not tell you which documents to produce, nor which not to produce. It will not tell you how to answer a request without opening a front the auditor had not identified. It will not tell you whether the cash-flow reconstruction used against you is accurate.
A personal tax audit is not won on the merits. It is won on the quality of the answers given in the two months following the first request for justifications, and on the regularity of a procedure that the taxpayer, alone, is not in a position to assess.
Lobe Law, a Paris law practice specialising in tax litigation, assists you throughout the personal tax audit and defends your case to its conclusion. Book a consultation.