Being audited is a stressful business. Being audited in France is a whole other level of stress due to the fact that tax and accountancy in France are not just matters of paperwork and filing, but matters of rigid laws that leave very little room for mistakes and carry high penalties.
We spoke to Alain Scemama (pictured) from the chartered accountants firm Action & Stratégie who are based in Le Mesnil Le Roi near Paris to get the full story about what lies ahead for anyone who gets the dreaded letter informing them of an audit on their French company.
"Why would the French tax office want to audit someone? Is it a random selection or is it because they don't understand your business activity or your tax declarations?"
Several reasons may lead to a tax audit. These include:
- a random selection
- being late for your tax returns
- your bank transactions not matching your statements
- because of inconsistencies in your accounts or inconsistency between the European declarations made by your customers or suppliers and your declarations
- because of suspicion linked to commercial relations with companies under surveillance
- following cross-checks on the verification of another company
- a tip-off from a person either within or outside your company reporting you for tax fraud
"How will the French tax office approach you with an audit? Do they telephone, do they send a letter or do they just turn up on your doorstep out of the blue?"
The tax audit is carried out by sending a registered letter to the head office of the company specifying the period to be checked and notifying you with the first date of a meeting which is called an “intervention”. The notice period is usually 15 days.
In cases of suspicion of fraud, the customs service may carry out an immediate intervention where they have the right to enter your home without notice and have the right to request or seize documents. At this point, you are no longer in a tax audit framework, but are instead within a police investigation.
"How much time do you have to prepare your paperwork between the initial contact and the first meeting? Or are there instances when they want to see your paperwork straight away?"
The delay before the first appointment is about 15 days. During this first appointment, the next two or three dates of the further interventions are set. Subsequent dates are fixed as and when required. In general, the auditor will check the accounts of the company one to two times a week. During each intervention, he asks for information or documents that need to be prepared for him for the next meeting.
"What will they require you to prepare and what will they want to see?"
During the first meeting, the main goal is to explain the activity of the company, its mode of operation and to draw up an organizational chart of the company. Some auditors may ask to review documents on the first date, but this is rare.
The documents to be submitted will generally be:
- Legal documents, general resolution of the board
- Balance sheets
- Account books
- VAT justifications
- The contracts
- Invoices and purchase orders
- Customs clearance justifications for exports
- Bank statements
Related article: How Do I Pay VAT/TVA in France?
"Is it better to ask for the help of a chartered accountant to help or can you do it yourself? What are the dangers of going it alone without professional help?"
It is essential to be assisted by an accountant. It’s a bit like having a lawyer on your side. If you don’t have a chartered accountant to assist you, you may end up saying too much and not realise that those words will then end up leading to requests for additional information. Similarly, when requesting documents, the client has no excuse not to give them immediately, whereas his accountant can effectively say that the documents are not part of the period or are not relevant for the particular audit. The same applies to any question asked, which gives time for reflection or research.
A professional accountant is accustomed to being in contact with auditors, our language is the same, we know their limitations and we can answer them on questions of law. A tax audit is not just a pile of documents, but a dialogue between two parties. Trust is easier to put in place when you are not the person in the direct firing line.
"How long can an audit take?"
The audit may cover the current year and the three previous calendar years. So in 2017, the auditor can come in to control 2017, 2016, 2015 and 2014. If you have a project that straddles two calendar years, it can exceed three years. For example, if you have a fiscal year that runs from July 1 to June 30, 2017, the auditor can control 2017, 2016, 2015, 2014 and as the fiscal year that closed on June 30, 2014 began on July 1 2013, it can go up to 1 July 2013. The duration of the audit is usually three months but it could be longer if the company's turnover is higher than 234,000 € per year. There is then no deadline and no time limit except to notify by 31 December the adjustments for the year.
"What happens during an audit?"
A room must be made available to the auditor with the requested documents. Frequently, an accountant has discussions with the auditor during the interventions, and makes a point after each intervention to give them the explanations requested or to write them down for the next intervention.
The auditor gives a list of requests for documents or information to be prepared, as well as the list of documents that they want copied. Accountants must make every effort to keep the relationship friendly and to have cordial and intelligent exchanges with the auditor. Taking him or her for an idiot or insulting him or her can only strengthen their determination and make it harder in analyzing your files.
"Do you have any advice on how to make an audit less stressful? Are there mistakes people make that make things worse during an audit?"
To make it less stressful, it is best to hire a professional. In fact, if possible it’s better to ask that the audit takes place physically in the accountant’s offices if they are in the same region. We also feel it’s better that clients are not present, except for the first and last appointment, which is mandatory, because an accountant knows the tax laws and will be better able to defend the clients rather than the client trying to do the job himself. The auditor who checks at the verified address can see what happens in the company and can note down all information they need.
Common mistakes are that the client can give too much information, which is often incomplete, and that can create more confusion and more prejudice. Likewise, they want to give the auditor every single document to prove their good faith, but this can lead to further investigations that will drag the process out. Often customers also say things that are wrong because they sound reasonable but can often just cause them harm because they don’t know the complicated tax laws.
Is the tax office harder on expat entrepreneurs because they don't understand the culture of the business activity?
This can be the case because the client is familiar only with the laws of their country of origin. In many countries accounting is only a support for the business but in France, accounting is actually a requirement by law for businesses. Failure to comply with the French accounting law may result in very strong penalties.
Language is also a barrier - both for understanding questions, and for giving answers which can be misinterpreted. Many expats don’t understand that from the moment they work in France, the French laws apply as regards to the accounting, fiscal, social or legal framework.
Related article: Business Banking in France - What NOT to do
What are the various different outcomes of an audit, and what happens if the tax office finds there is something wrong with your accounts?
If the audit shows no inconsistencies with the accounts, there may be no tax adjustment to make. But if there is a problem, then adjustments may need to be made to the VAT, corporation tax and various taxes. These adjustments need to be paid by the company plus the penalty fines.
The penalties are usually:
- Interest on delays of payment (0.4% per month)
- A penalty of 10% of the sum if good faith is admitted
- A penalty of 40%, 80% or 200% if the sum is calculated to have been in bad faith or due to fraud.
If any of these penalties are disputed, it is possible to go back to the audit commission and go before the administrative court but it’s a costly procedure and as the judges are administrative experts it’s very rare that penalties are overturned.
If you need any further information about audits in France, need a professional English-speaking chartered accountant in France, or want more information on how to set up a company in France you can download our free guide below or get in touch using our contact page and we’ll be happy to help.
