Article 1729 of the French General Tax Code is an essential pillar of the repressive tax system. This text defines the surcharges applicable in the event of under-reporting by the tax authorities. You need to be fully aware of this legal framework to anticipate risks and organize an effective defense. Tax penalties are graduated according to the seriousness of the offence.

What is article 1729 of the CGI?

Article 1729 of the General Tax Code sets out the scale of surcharges applicable to tax evaded. This legal provision is designed to penalize taxpayers who declare inaccurate or incomplete amounts. The tax authorities thus have a dissuasive tool at their disposal to ensure the accuracy of tax returns.

The text distinguishes three levels of penalty, depending on the nature and seriousness of the taxpayer’s behavior. This graduation enables a proportionate response to the different situations encountered. You are affected if you are found to have filed an insufficient tax return during a tax audit, particularly during an accounting verification.

The main objective is to ensure spontaneous compliance with reporting obligations. The surcharges are added to the reminder duties and late payment interest. This combination can represent a considerable financial burden for your company or your personal assets.

The various surcharges provided for in Article 1729

Article 1729 of the General Tax Code sets out three different rates of increase. Each rate corresponds to a specific degree of non-compliance with tax obligations. You need to understand these distinctions to assess your risk exposure and anticipate the financial consequences of a tax audit.

The 10% surcharge

This surcharge applies in cases of simple late filing or unintentional omission. It is applied in the event of negligence, material error or oversight. You benefit from this reduced rate when your good faith is established and the tax authorities can demonstrate no intention to evade tax.

The specific situations giving rise to this surcharge include: forgetting to declare a foreign bank account with no significant movement, a data-entry error in the amount of income declared, the omission of a property income line due to ignorance of tax rules, or an unintentional accounting error in determining taxable income.

Before applying this surcharge, the tax authorities must demonstrate the existence of an under-declaration. It can only apply the surcharge if the evaded duties have actually been established. The amount of the surcharge is calculated directly on the recalled duties. For example: if the tax authorities send you a reminder for €10,000 in duties, the 10% surcharge will amount to €1,000, bringing the total to be paid to €11,000 (excluding late payment interest).

This 10% surcharge represents around 60% of the surcharges applied by the tax authorities, making it the most frequent penalty. It may be waived or not applied in certain favorable situations: in the case of a first minor infraction, when the taxpayer makes a spontaneous adjustment before any tax audit, or when the error results from a reasonable interpretation of an ambiguous text. The deadline for making a spontaneous adjustment and avoiding any surcharge runs until receipt of the verification notice or the rectification proposal.

The 40% surcharge

Deliberate failure to comply leads to the application of a 40% surcharge. This penalty applies to behavior characterized by a deliberate intention to evade tax. You are exposed to this rate when the tax authorities demonstrate your intention to evade your tax obligations through objective and concordant elements.

The burden of proof lies with the tax authorities. It must establish the deliberate intention to evade tax by a body of converging evidence. Judges have full discretion to assess the existence of a deliberate tax evasion based on a number of criteria: the size of the sums involved, the repetition of tax evasion over several years, the habitual nature of the omissions, the taxpayer’s competence in tax matters, and the sophistication of the schemes used. The case law of the Conseil d’Etat (CE, March 21, 2018, n°402925) specifies that these elements must be assessed globally to characterize fraudulent intent.

The distinction between unintentional error and deliberate failure to act is crucial. Mere negligence or misinterpretation of the law are not sufficient to establish intent. On the other hand, repeated concealment of rental income for three consecutive years is a serious indication of deliberate breach. Similarly, systematic failure to declare capital gains when you regularly carry out real estate transactions reinforces the presumption of fraudulent intent. Whether the failure is isolated or recurrent is an essential criterion for assessment.

Litigation statistics show that this surcharge is maintained in around 40% to 50% of cases after being contested before the tax judge. This relatively high rate of abandonment or reduction fully justifies the initiation of a contentious procedure when you contest the qualification of deliberate breach. Solid legal argumentation, based on an analysis of the evidence and the applicable case law, is often sufficient to obtain reclassification as a simple failure to declare, subject to the reduced surcharge of 10%.

The 80% bonus

A fraudulent maneuver is characterized by material acts of concealment or falsification intended to mislead the tax authorities. This notion goes beyond the simple intention to evade tax: it implies the implementation of an organized scheme involving falsified evidence. The application of an 80% surcharge sanctions the most serious forms of tax evasion, but remains exceptional in practice (less than 5% of surcharges applied).

Typical examples of fraudulent maneuvers include the creation of fictitious invoices to reduce taxable income, double bookkeeping to conceal a portion of sales, or the use of shell companies to divert income. The maximum penalty is incurred when the tax authorities demonstrate the existence of material acts of falsification or concealment, or the use of fictitious documents.

The distinction between the 40% surcharge and deliberate tax evasion lies precisely in this material aspect. Whereas the deliberate breach sanctions the intention to evade tax (for example, the deliberate failure to declare income), the 80% increase requires proof of positive acts of deception. A practical case illustrates this difference: a company that creates false invoices for services worth €150,000 over 2 years commits a characterized fraudulent maneuver, justifying the maximum increase.

The administration must prove that the fraudulent acts were intentional and organized. This is evidenced by the premeditation of the scheme, its technical complexity, and often the plurality of coordinated acts over time. A simple failure to file declarations, however significant, is never sufficient to characterize a fraudulent maneuver without these material elements of concealment.

Terms and conditions of application

The application of surcharges is subject to strict procedural rules. The tax authorities must comply with precise formalities. You have substantial guarantees throughout the audit procedure. These surcharges are added to the duties assessed when the tax is settled, and can significantly increase the taxpayer ‘s total tax burden.

Declaration of Insufficiency

The tax authorities must first establish the existence of an insufficient declaration. This is usually the result of an accounting audit or a contradictory examination of your personal tax situation. You will then receive a proposal for rectification, which must not only detail the proposed adjustments, but also give specific reasons for each increase applied, in accordance with article L. 57 of the French Tax Code.

Failure to give reasons for the increase constitutes a substantial formal defect, which may result in the penalty being declared null and void. The tax authorities must explain the factual and legal elements justifying the application of the rate applied. This requirement to state reasons enables you to prepare your defense effectively and assess the validity of the penalty.

You have 30 days from receipt of the rectification proposal to formulate your observations. This period is extended to 60 days if you request referral to the departmental direct tax and sales tax commission or the national commission. You may also request additional time to prepare your response.

Deficiencies may relate to various elements of your tax assessment. They concern tax bases, declared income, deducted expenses or applied tax credits. Each deficiency must be precisely justified by the tax authorities, failing which you have a serious means of contesting it before the tax judge.

Burden and Reversal of Proof

The burden of proof varies according to the type of surcharge applied, and is a determining factor in tax disputes. In the case of the 40% surcharge, the tax authorities must prove the deliberate breach of tax law through objective and concordant evidence. For the 80% surcharge, it must establish the existence of fraudulent maneuvers. In the absence of sufficient proof, the judge will set aside the surcharge and may reduce it to the lower rate.

You can challenge the evidence put forward by the tax authorities by demonstrating that it is insufficient or equivocal. The tax judge has full discretion to assess the probative value of the evidence presented by each party. The assistance of a tax lawyer specialized in litigation is essential to build a solid case. An appropriate litigation strategy, based on an in-depth analysis of the applicable case law, can lead to total or partial abandonment of the surcharges.

Strategies for defending against surcharges

There are three main ways of contesting tax surcharges. Firstly, you can challenge the legal definition of the offence: a deliberate offence can be reclassified as simple negligence, reducing the tax surcharge from 40% to 10%. Secondly, you can contest the materiality of the facts complained of, by demonstrating the absence of declaratory shortcomings or the accuracy of your declarations. Thirdly, you can invoke a procedural defect if the tax authorities have not respected the mandatory procedural guarantees during the audit.

Statistics demonstrate the effectiveness of these appeals: some 60-70% of appeals result in a reduction or total elimination of the surcharge. The arguments most frequently put forward by judges include the complexity of the applicable tax legislation, the fact that the taxpayer is a first-time offender, the small amount of duty evaded, and above all the spontaneous regularization carried out prior to any audit. Demonstrating good faith is a decisive factor in the judge’s assessment.

Before taking legal action, always try to reach an amicable settlement. The tax authorities may accept a settlement leading to the partial or total waiver of surcharges, particularly when the case presents legal weaknesses. The assistance of a lawyer specializing in tax litigation is essential to negotiate this settlement effectively. An in-depth legal analysis will help you identify procedural flaws and build a solid technical argument, maximizing your chances of obtaining a waiver of penalties.

If the amicable phase fails, the remedies range from a contentious claim before the administrative court to the Conseil d’Etat. You have a mandatory period of two years from the date of assessment to lodge your claim. Each stage requires documented legal argumentation and the use of favorable case law. The cost of contentious proceedings, generally between 3,000 and 10,000 euros depending on their complexity, must be weighed against the amount of the disputed surcharges and the chances of success of your case.

Cumulative surcharges and interest on arrears

It is essential to understand that the surcharges provided for in article 1729 of the CGI are not the only penalties applicable. In fact, these penalties are systematically added to the late payment interest defined in article 1727 of the CGI. This interest, calculated at a rate of 0.20% per month (i.e. 2.4% per annum), is intended to compensate the Treasury for the financial loss incurred as a result of late tax payment.

To illustrate the cumulative financial impact in concrete terms:
Example: For a tax reminder of €10,000 over a period of 2 years, the taxpayer will have to pay:
– Recalled duties: €10,000
– Interest for late payment: €480 (€10,000 × 2.4% × 2 years)
– Increase for deliberate failure to pay (40%): €4,000
– A total of €14,480.

It should be noted that interest on arrears runs until the date of assessment of the additional tax. Unlike surcharges, which can be contested on the merits in a contentious appeal, interest on late payment can only be challenged on the basis of its calculation, since the principle of interest on late payment is indisputable once the tax has been paid late.

The total financial impact of these penalties can therefore be considerable, frequently reaching between 50% and 100% of the duties initially evaded, depending on the length of the delay and the rate of increase applicable. This reality underlines the crucial importance of rigorous management of reporting obligations, and of an appropriate defense strategy in the event of a tax audit.