How should you respond to a request for information from the tax authorities?

A request for information from the tax authorities is never insignificant. It does not necessarily mean that a tax audit will be initiated, but it may be the first step in a more detailed examination of your situation.

To ensure that tax is correctly assessed, the tax authorities have several procedures enabling them to gather information, carry out cross-checks and identify any omissions, understatements or filing irregularities.

These procedures do not, however, have the same purpose, the same scope or the same consequences for the taxpayer.

Responding to a simple request for information may therefore be optional, whereas a request for justification that is not properly dealt with may lead to an ex officio assessment.

Understanding the exact nature of the letter received is therefore essential before responding to it.

1. Requests for tax information: how can the tax authorities’ procedures be told apart?

The request for information: a procedure that is not legally binding

As part of their right of audit under Article L. 10 of the French Tax Procedures Code (Livre des procédures fiscales, LPF), the tax authorities may ask a taxpayer for clarification of matters they wish to clear up.

The request may be made orally or in writing, in particular on form no. 754. It may cover any point that helps the tax authorities better understand the taxpayer’s tax situation.

This procedure has one important feature: it is not binding.

The taxpayer may therefore choose not to respond without any specific penalty being incurred for that reason. Nor does the request interrupt the limitation period.

That does not mean, however, that it is always advisable to ignore it.

No response, a vague response or the disclosure of information whose implications have not been properly assessed may lead the tax authorities to deepen their investigations, to use a more coercive procedure or even to launch a full tax audit.

The task is therefore to decide what is useful to communicate, in what level of detail and with which supporting documents.

Request for clarification or justification: a carefully prepared response is essential

The position is different where the tax authorities send a request for clarification or justification.

This procedure is binding. For income tax, it is provided for in Article L. 16 of the LPF. Article L. 16 A of the LPF requires the taxpayer to be given at least two months to respond and, where the response is insufficient, to be given formal notice to complete it within thirty days.

If no response is given, the tax authorities may use the ex officio taxation provided for in Article L. 69 of the LPF or, for property income and capital gains, the ex officio assessment provided for in Article L. 73 of the LPF.

Comparable requests exist for other taxes, in particular the real estate wealth tax (Article L. 23 A of the LPF) and certain items in inheritance tax returns (Article L. 19 of the LPF). Failure to respond there, however, in principle leads to an adversarial reassessment rather than ex officio taxation.

The distinction between a simple request for information and a request for justification is therefore decisive.

A response prepared too quickly may lead the taxpayer to disclose more than is legally required or, conversely, to respond inadequately to a request that called for precise justification.

2. Right of disclosure: the tax authorities can obtain information from third parties

Who can the tax authorities approach?

The tax authorities do not gather information solely from the taxpayer.

Articles L. 81 et seq. of the LPF allow them to exercise a right of disclosure (droit de communication) with respect to many individuals and legal entities required to keep and provide certain information.

This right may be exercised in particular with businesses, banks, certain professional practices classified as non-commercial for French tax purposes, the State or local authorities.

The tax authorities may thus obtain bank statements from a bank, commercial information from a supplier or toll records from a motorway company.

The right of disclosure nevertheless has its limits. For businesses, for example, investigations of this kind must remain occasional and be limited to merely inspecting and recording the entries, without critically examining the accounts. A genuine critical examination of the accounts, by contrast, could amount to the start of an audit of the accounts, which is governed by a distinct procedural framework.

Refusal to comply with the right of disclosure may result in a fine of 10,000 euros under Article 1734 of the French General Tax Code. One should therefore not count on the persons approached by the tax authorities refusing to cooperate.

The taxpayer must be informed where the tax authorities use information obtained from third parties

The tax authorities’ power to gather information has an essential counterpart in the taxpayer’s safeguards.

Where the tax authorities intend to use information or documents obtained from third parties to make an assessment, Article L. 76 B of the LPF requires them to inform the taxpayer of their content and origin.

The taxpayer may also request a copy of the documents concerned before the tax is issued for collection.

This safeguard is fundamental to the adversarial nature of the procedure.

It enables the taxpayer to know the information actually being used against them and, where appropriate, to discuss its scope, reliability or interpretation.

3. Investigative procedures: anticipating before investigations become more intrusive

As the risk of fraud increases, the tax authorities’ powers widen

Alongside the standard information procedures, the legislature has provided several more intrusive investigative tools where the risk of fraud appears greater.

The tax authorities may in particular exercise a right of inquiry in VAT matters, under Article L. 80 F of the LPF, in order to detect breaches of invoicing obligations.

They may also interview third parties as part of the fight against international tax fraud and evasion, in particular on questions of tax residence or territoriality of tax. The records of these interviews may then be used in an audit.

In the most sensitive situations, the tax authorities may also use the procedure for dealing with tax irregularities detected as they occur (flagrance fiscale), a tax search or a judicial tax investigation.

The latter may lead, in certain cases of serious fraud where there is a risk of evidence disappearing, to the use of judicial powers such as interviews, telephone tapping or police custody.

Responding to the tax authorities requires a command of the framework of the request

Not all requests from the tax authorities should therefore be handled in the same way.

Before any response, it is necessary to identify precisely the procedure used, whether or not it is binding, the applicable time limits, the documents actually requested and the consequences of an incomplete or overly broad response.

The involvement of a tax lawyer makes it possible to analyse the scope of the request, to determine what information must be provided, to identify the safeguards available to the taxpayer and to anticipate any subsequent audit.

Based in Nice, the Valenor firm assists private individuals and businesses from the first requests for information from the tax authorities, in order to secure the responses given, preserve the taxpayer’s rights and prevent an apparently simple step from unnecessarily weakening their tax position.

Our objective is to keep control of exchanges with the tax authorities from the first investigations and, where necessary, to prepare the defence strategy before a full audit procedure is initiated.

Bruno Gherardi
Tax lawyer in Nice - Cabinet Valenor