The ESFP (Examen de Situation Fiscale Personnelle) tax audit is an in-depth verification of your overall tax situation. It enables the tax authorities to examine all your income, expenses and assets, including your annual accounts and bank transactions, to verify the consistency of yourdirect tax declarations. Understanding the mechanisms of this procedure is essential to protect your rights and organize your defense effectively. The ESFP tax audit is one of the most intrusive procedures available to the tax authorities.

What is the ESFP tax audit?

The Examen de Situation Fiscale Personnelle (ESFP) is a tax audit procedure aimed exclusively at individuals. The tax authorities reconstitute your lifestyle on the basis of all your expenses, and compare this amount with the income you have declared. This audit covers your entire personal tax situation, including all taxes due on a personal basis: income tax, social security contributions and property wealth tax, where applicable.

The ESFP differs from other forms of control in that it is comprehensive and personal. The tax authorities meticulously examine your bank accounts, property acquisitions (real estate, vehicles, works of art), current and exceptional expenses (travel, work, schooling). It checks the consistency between your declared resources and your actual standard of living, by applying a flat-rate lifestyle scale or by reconstituting your actual expenses. This procedure can go back up to three calendar years, extended to six years in cases of presumed fraud, or even ten years in the case of undeclared foreign assets.

Scope and time limits

ESFP tax audits apply only to individual taxpayers domiciled in France for tax purposes. Companies and other legal entities are subject to other procedures, such as an accounting audit. The tax authorities can examine all your income, whether French or foreign, business or personal.

Tax statutes of limitation generally limit the scope of the audit to three years. This period is extended to ten years if undeclared foreign assets are discovered. The tax authorities may also invoke special time limits in certain situations provided for in the General Tax Code.

ESFP procedure

The procedure begins with the dispatch of an audit notice. This document officially informs you that the audit has been initiated, and specifies the years concerned by the examination. You have an incompressible minimum period of time before the first meeting with the auditor, generally two weeks. The tax authorities must respect the audited taxpayer’s charter of rights and obligations, which is given to you with the audit notice.

The auditor then proceeds to a detailed examination of your personal tax situation. He or she may ask you for precise details of the origin of your income, your major expenses, your acquisitions of assets or any other aspect of your lifestyle. You must respond to these requests within the allotted timeframe, generally set at two months. Failure to respond, silence or insufficient answers may result in adverse consequences, including automatic taxation and reversal of the burden of proof.

Requests for justification and your obligation to respond

The tax authorities may request clarification of specific aspects of your tax situation as part of the ESFP. These requests frequently concern major bank loans, real estate acquisitions and lifestyle expenses, as well as the origin of the funds used for your investments. You need to provide precise, documented proof: invoices, sales or purchase contracts, bank statements, loan certificates, deeds of gift or inheritance. Each significant asset must be explained by an identifiable and verifiable source of financing. The response time is generally two months, extendable on reasoned request.

Failure to respond within the allotted timeframe, or the manifest inadequacy of the supporting documents provided, authorizes the tax authorities to proceed with an automatic tax assessment, in accordance with Article L. 69 of the French Tax Code. In this case, the burden of proof is completely reversed: you will have to demonstrate that the tax bases used by the auditor are exaggerated – a particularly difficult exercise in practice. This unfavorable situation justifies a complete, well-argued and documented response to each request. The absence of justification on a specific point may lead the tax authorities to consider the sums concerned as undeclared taxable income, with the application of the corresponding penalties.

The rectification proposal and your rights

If the auditor identifies shortcomings or omissions in your tax returns, he or she will draw up a proposal for rectification. This document sets out the proposed adjustments, their legal basis and the applicable penalties. You have thirty days in which to submit your observations and contest the rectification proposal.

Responding to the tax adjustment proposal is a decisive step. You can challenge the tax reassessment on its merits, invoke errors of law or fact, or provide additional explanations. The tax authorities must examine your observations and provide a reasoned response. In the event of persistent disagreement, you can refer the matter to the departmental commission for direct taxes and sales taxes (commission départementale des impôts directs et des taxes sur le chiffre d’affaires).

Procedural guarantees for taxpayers

The General Tax Code and the Book of Tax Procedures establish a substantial protective framework for the audited taxpayer. The tax authorities must respect the adversarial principle at every stage of the ESFP procedure. This fundamental principle guarantees you the right to be informed of the grievances against you, and to present your observations before any unfavorable decision is taken.

You have the right to be assisted by an advisor of your choice: a tax lawyer, chartered accountant or any other qualified professional. Such assistance is particularly advisable given the technical complexity of the issues at stake and the potential financial consequences. Your advisor can be present at meetings with the auditor, and can intervene at any stage of the procedure.

The tax authorities may not make any tax adjustments without first informing you by means of a reasoned tax adjustment proposal. This statement of reasons must be precise and detailed, indicating the applicable legal texts, the facts of the case and the calculation of the proposed adjustments. Failure to give sufficient reasons constitutes a procedural irregularity which may lead to the tax assessment being declared null and void, or to full discharge.

You are also guaranteed deadlines: a minimum of 30 days to respond to a rectification proposal, and two months to provide the requested justifications. Failure by the tax authorities to meet these deadlines, or to include the required information in procedural documents, may invalidate the audit. These procedural guarantees are essential defences, and should be invoked systematically in the event of irregularity.

Defense strategies in the face of an ESFP

Building a solid defense case requires methodical preparation. Gather all supporting documents relating to your income and expenses for the years under review. Identify the sources of financing for your asset acquisitions: donations, inheritances, loans, previous income. Document each item precisely and chronologically.

The involvement of a specialized tax lawyer provides essential legal expertise. This professional analyzes the legality of the procedure, identifies the relevant defenses, and drafts responses to the tax authorities’ requests. He or she negotiates with the auditor to limit the amount of tax reassessments and penalties. His assistance significantly increases your chances of obtaining a favorable outcome. In certain cases, collaboration with a chartered accountant or specialized accounting firm may also prove useful in reconstructing and justifying your financial flows.

Negotiating with tax authorities

The adversarial phase offers substantial opportunities for negotiation. You can propose alternative justifications to the administration’s presumptions, demonstrate the exaggeration of certain assessments, and request the moderation of penalties. The tax authorities have a margin of appreciation, and may accept settlements within certain legal limits. Negotiable elements include the characterization of breaches, the calculation of the applicable effective tax rate, and the assessment of whether omissions were deliberate or not.

The negotiation strategy must be based on solid documentation and precise legal argumentation. You can contest the reconstitution of your lifestyle by providing evidence of the origin of your resources: family donations, inheritances, income from previous years, loans taken out. The presentation of convincing evidence often makes it possible to obtain a partial waiver of reassessments or a significant reduction in the penalties initially envisaged.

Spontaneous tax adjustments made before the rectification proposal is received enable you to benefit from a lighter penalty regime. This approach requires prior analysis of your situation and anticipation of tax risks. It requires the support of an advisor to assess the appropriateness and modalities of regularization, particularly when substantial irregularities have been identified.

The consequences of an ESFP tax audit

Increases resulting from an ESFP generate additional taxes, together with interest on arrears. The interest rate is 0.20% per month, or 2.4% per annum. Interest accrues from the date of assessment until actual payment. It is added to the main tax and can represent significant amounts, particularly when the audit covers several years.

The tax authorities also apply penalties, the rate of which varies according to the nature and seriousness of the shortcomings observed. Penalties range from 10% for insufficient declaration to 80% for fraudulent maneuvers. Penalties of 40% are applied in the case of deliberate failure to comply, a situation frequently encountered in the case of ESFP when the tax authorities consider that you could not have been unaware of your reporting obligations. These surcharges are applied to the recalled duties, in addition to late payment interest, adding considerably to the final cost of the reassessment.

Litigation procedures

If the disagreement persists after the contradictory phase, you can take legal action. You must first lodge a complaint with the tax authorities. This claim must be lodged before December 31 of the second year following assessment. It suspends payment of the disputed tax under certain conditions.

If your claim is rejected, you have two months to take your case to the administrative court. Litigation allows your case to be fully re-examined by an independent judge. The assistance of a tax lawyer is essential to effectively manage this contentious phase and maximize your chances of success.

Protect your rights against ESFP tax audits

ESFP tax audits are complex procedures with considerable financial implications. Mastery of the procedural and substantive rules determines the outcome of the audit. You need to react quickly on receipt of the audit notice to organize your defense effectively. A well-documented file and the assistance of specialized counsel are decisive assets.

Don’t wait for the rectification proposal to request legal assistance. Early intervention allows you to anticipate difficulties, prepare the necessary justifications and adopt the most appropriate defense strategy. Altertax Avocats puts its expertise in tax law at your service to defend you against ESFP tax audits.