Tax Audits and Tax Litigations

A tax audit is the process by which the tax authority ensures that the tax declarations of a taxpayer (individual or business) are accurate and in compliance with the current tax regulations. The tax audit can be conducted randomly or with a specific focus, and it may cover various aspects of the taxpayer’s fiscal situation, such as income, deductions, tax credits, etc.

If the tax authority identifies errors or omissions during the tax audit, it may send the taxpayer a proposed adjustment (notice of correction), which is a notification specifying the additional amounts of taxes, interest, and penalties being claimed.

The in-person tax audits

A tax audit can take various forms, each with different levels of intrusiveness.

The most “comprehensive” tax audit includes:

• A contradictory examination of the personal tax situation (ESFP) for individuals.
• An accounting audit for businesses.

These tax audits involve a thorough examination of the individual’s or company’s fiscal situation. They typically span over several months and involve multiple meetings and exchanges between the taxpayer and the auditor, during which the taxpayer’s declarations are meticulously analyzed and discussed.

Remote tax audits

In addition to these comprehensive tax audits, the tax authority may conduct a “documentary audit,” which is carried out remotely. In this case, the taxpayer will be notified of any adjustments through a written notice.

It is important to be particularly vigilant upon receiving a “request for information” from the tax authority. Despite being presented as “non-binding,” this request for information effectively constitutes a full-fledged tax audit. Receiving such a request indicates that the taxpayer’s situation has attracted the attention of the tax authority, which is seeking additional information or documents to confirm or refute its suspicions. Prompt and careful response is essential in such cases.

To defend yourself on equal terms against the tax authority. The auditor is a tax control professional with numerous adjustments to their credit. Your situation has been identified in advance for a tax audit based on the information available to the tax authority. In these anxious moments, you need an experienced professional to restore the imbalance you are facing.

To be coached by a specialist. Your attorney will guide you in adopting the language and codes expected in a dialogue with the tax authority, thus increasing your chances of success.

To avoid self-incrimination. Faced with stress and pressure, a self-represented taxpayer may speak against their own interests or even self-incriminate. In contrast, the attorney can advise you on the information and documents the tax authority is entitled to request.

To benefit from legal expertise. Your attorney will guide you through the complexities of tax law and procedures to best defend your interests.

To assert your rights. During a tax audit, the auditor is neither your friend nor your enemy; they are a public servant doing their verification job. It is not their role to advise or inform you about your rights and procedures, unless the law requires them to do so. Your attorney, on the other hand, is there solely to defend your interests, regardless of others’ interests.

To define and follow the best strategy. Each case is unique and requires an adapted strategy. Depending on the case and the parties involved, your attorney can advise you on the best course of action, whether it’s challenging when appropriate or refraining from doing so when it’s futile or detrimental to your interests.

Tax litigation refers to disputes that arise between a taxpayer and the tax authority after a tax audit. If the taxpayer disagrees with the proposed adjustments, they can challenge the tax authority’s decision by initiating a pre-litigation procedure before the tax authority itself. Subsequently, if the tax authority maintains its disagreement, the taxpayer can initiate tax litigation before administrative or judicial courts.

Tax litigation can also occur outside of a tax audit, for example, when the taxpayer challenges a decision by the tax authority regarding reimbursement, tax credit, regularization, etc.

Following the tax audit, the tax authority will send the taxpayer either a “notice of no verification,” indicating that no adjustment is made to the taxpayer’s charge, or a “proposed adjustment” outlining the reasons and amounts of the proposed adjustment.

In case of disagreement, the taxpayer, with their attorney, can contest the adjustments in two phases:

1. A phase before the tax authority

In the event of an adjustment, the contestation procedure takes place initially before the tax authority.

The procedure involves several exchanges with the tax authority, asking it to reconsider its position and abandon, entirely or partially, the adjustments.

It is important to note that the tax authority does not have the right to make gifts (libéralités). This means that the tax authority cannot “give away” taxes. Thus, when taxes are due, the tax authority does not have the option to cancel them, except in cases where the taxpayer is definitively unable to settle their taxes, even with installment measures (this is the case of a taxpayer facing indigence).

Requests for “graceful remission” are therefore often doomed to failure.

To obtain tax remission, the taxpayer must, with their attorney, present legal and factual arguments to challenge the validity of the adjustments and obtain reductions.

Once the avenues of appeal before the tax authority have been exhausted, the tax authority will send the taxpayer a “recovery notice,” requesting payment of the disputed amounts.

The tax attorney will attempt a final recourse, the contentious appeal, and if the tax authority maintains the adjustments, the attorney can then bring the matter before the relevant courts.

2. A phase before the judicial authorities

Depending on the nature of the contested tax, the procedure may take place before the administrative court or before the judicial court.

In general, the tax procedure is “written”: exchanges occur in writing between the taxpayer’s attorney and the tax authority.

Your tax attorney will represent you in these exchanges until the pleading and the conclusion of the procedure.

The chances of success in a tax dispute depend on many factors specific to each case. Each case is unique, and there is no guarantee of success. The results depend heavily on specific circumstances such as:

The strength of the legal reasoning followed by the tax authority and the taxpayer.
The correct interpretation of tax laws.
The value of written evidence provided by the taxpayer.
The practices of tax authorities and courts.
In general, tax disputes involve numerous exchanges between the taxpayer and the tax authority at various stages of the procedure: exchanges during the audit, exchanges related to the proposed adjustments, contentious claims, exchanges of legal briefs before the courts. All these stages provide opportunities to present a strong argument and supporting documents in order to prevail before the tax authority.

It is very common for the tax authority to adopt the taxpayer’s position during these exchanges and simply drop the initially proposed adjustments. It also frequently happens that the tax authority revises its position and abandons the adjustments during the proceedings before the administrative or judicial tribunal; in such cases, the tribunal issues a “non-liquet” or acknowledges the taxpayer’s “withdrawal” as the dispute has been settled before the tribunal’s decision. Therefore, based on experience, the vast majority of cases “won” by the taxpayer are resolved even before the judge makes a decision.

The challenge of the adjustment and the payment of the adjusted amounts are two separate aspects that are not managed by the same tax services. The first is handled by the assessment department, while the second is managed by the collection department.

Paying the adjustments does not deprive you of the right to contest. Conversely, contesting does not automatically exempt you from paying the adjustments.

Payment is due upon receipt of the recovery notice. However, a request for a payment deferral can be made in addition to a contentious claim.

The payment deferral has the effect of suspending the enforceability of the amounts claimed by the tax authority until the tax authority makes a decision on the contentious claim. The payment deferral continues throughout the entire process before the administrative or judicial tribunal. However, the tax authority may request the taxpayer to provide guarantees, such as a mortgage or a bank guarantee.

The decision to use the payment deferral should be made in consultation with your tax attorney, taking into account factors such as the chances of success, the taxpayer’s cash flow, the ability to provide guarantees, and the risk of having to pay late interest in addition to the taxes if the tribunal’s decision is unfavorable