Tax error or tax fraud: where does the line lie?

An error in a tax return does not make a taxpayer a fraudster. However, where the tax authorities consider that an omission or concealment was deliberate, a simple reassessment may take on a criminal dimension.

An incomplete income tax return, undeclared business receipts or a disputed tax residence may raise very different questions depending on the circumstances in which the irregularities occurred.

The offence of tax fraud, provided for in Article 1741 of the French General Tax Code (Code général des impôts, CGI), requires proof not only of acts enabling tax to be evaded, but also of fraudulent intent.

This distinction is essential. Where a tax audit reveals irregularities that may constitute a criminal offence, the taxpayer must have the opportunity to dispute both the facts alleged against them and the intent attributed to them.

1. What conduct can constitute tax fraud?

What is the difference between a tax error and fraud?

An inaccurate or incomplete return may result from a misinterpretation of the legislation, a clerical error or an unintentional omission. Such irregularities may justify a tax reassessment without necessarily amounting to criminal fraud.

The position is different where the taxpayer deliberately seeks to evade the assessment or payment of tax.

Article 1741 of the CGI thus punishes certain intentional conduct, in particular the deliberate failure to file a return, the concealment of income or the organisation of one’s own insolvency to obstruct the collection of tax.

The offence therefore rests on two inseparable elements: the existence of conduct constituting the factual element of the offence and the taxpayer’s fraudulent intent.

Mere negligence cannot, on its own, establish the offence of tax fraud. The circumstances of the case must also make it possible to show that the taxpayer deliberately evaded their tax obligations.

What are the most common examples of tax fraud?

Tax fraud can take very different forms and does not necessarily involve a complex scheme.

It may result in particular from the deliberate omission of income from a return, the concealment of business receipts, the artificial inflation of deductible expenses or the declaration of fictitious losses.

Other situations have an international dimension. They may involve, for example, the use of foreign structures to conceal income or the establishment of a fictitious tax residence abroad in order to escape French taxation.

Holding a foreign bank account, like setting up a company abroad, remains perfectly lawful. It is the fraudulent use of these instruments to evade tax that may constitute an offence.

Fraud may also result from transactions intended to place certain assets deliberately beyond the reach of the tax authorities’ enforcement measures (a gift of property to a young child, lavish spending leading to insolvency, etc.).

2. How do the tax authorities establish the existence of fraud?

What evidence can demonstrate fraudulent intent?

Establishing a tax irregularity does not remove the requirement to prove that the offence was intentional.

Under Article L. 227 of the French Tax Procedures Code (Livre des procédures fiscales, LPF), the burden of this proof lies with the public prosecutor and the tax authorities.

In practice, fraudulent intent may be inferred from several circumstances: repeated omissions, the size of the sums involved, accounting anomalies or persistence in irregular conduct despite formal notices.

The taxpayer’s profession, experience and any previous tax history may also be taken into account in assessing the facts.

These various elements must nevertheless be examined in the light of the individual’s particular situation. The size of a reassessment does not, on its own, show that all the irregularities found stem from an intention to defraud.

The defence must therefore address the facts alleged, but also the way in which the prosecution intends to establish that they were intentional.

Can a company director be prosecuted for fraud committed by their company?

A director may incur criminal liability for tax irregularities committed within their company, even where they did not personally prepare the returns in question.

This liability does not, however, follow automatically from their position as director. It requires proof of personal and intentional participation in the acts alleged.

Entrusting the accounts or tax returns to an employee or an external provider is not necessarily sufficient to rule out this liability.

By contrast, an effective delegation of powers covering the company’s tax obligations, granted to a person with the necessary competence, authority and resources, may be a decisive factor.

The criminal liability of the company itself may also be engaged, as may that of persons who knowingly participated in the fraud, under the conditions laid down in particular in Articles 121-2 and 121-7 of the French Criminal Code.

3. Tax fraud: what penalties and what criminal risks?

When is tax fraud considered aggravated?

The offence of tax fraud is punishable by five years’ imprisonment and a fine of 500,000 euros, which may be increased to twice the proceeds of the offence.

These penalties rise to seven years’ imprisonment and a fine of three million euros, which may also be increased to twice the proceeds of the offence, where certain aggravating circumstances are established.

Article 1741 of the CGI refers in particular to fraud committed by an organised gang or facilitated by the use of foreign accounts, the use of intermediary structures established abroad, the use of false documents, a fictitious or artificial tax domicile abroad or the use of fictitious or artificial acts or entities.

A conviction may also have significant financial and professional consequences, in particular the confiscation of certain assets, professional bans or the publication of the court decision.

The stakes of criminal proceedings for tax fraud therefore go far beyond the mere payment of the disputed taxes.

How can you defend yourself against allegations of tax fraud?

Where a proposed reassessment reveals a risk of criminal prosecution, the defence must be considered from the earliest stages of the procedure.

It requires in particular a distinction between whether the taxes claimed are well founded, any tax penalties, and the elements capable of establishing the offence of tax fraud.

The involvement of a tax lawyer makes it possible to examine the circumstances of the irregularities identified, to dispute the characterisation adopted by the tax authorities and to analyse the evidence relied on to demonstrate fraudulent intent.

Where a company is concerned, particular attention must also be paid to the role actually played by its directors and to the personal liability they may incur.

Based in Nice, the Valenor firm assists taxpayers and company directors facing a risk of allegations of tax fraud, from the audit stage onwards and, where the situation requires, in coordination with a criminal defence lawyer.

Our objective is to anticipate the criminal consequences of the case, to preserve the taxpayer’s rights and to build a defence strategy suited to the facts alleged against them.

Bruno Gherardi
Tax lawyer in Nice - Cabinet Valenor