The tax authorities have a number of tools at their disposal to check the consistency between your declared income and your lifestyle. Among these procedures, the Examen de Situation Fiscale Personnelle (ESFP) is a specific tax audit that directly concerns individual taxpayers. This procedure enables the tax authorities to analyze your assets and financial situation in order to detect any inconsistencies. If any discrepancies are found, the audit may result in a tax reassessment and penalties.

What is the ESFP tax audit?

The Examen de Situation Fiscale Personnelle (ESFP) is a tax audit procedure provided for under article L16 of the Livre des Procédures Fiscales, which applies exclusively to private individuals, unlike an accounting audit reserved for professionals. It enables the auditor to examine the consistency between your declared income and your overall financial situation, by analyzing your expenses, real estate acquisitions, financial investments and general lifestyle over a given period.

ESFP objectives

• Detect undeclared or concealed income and identify situations of tax fraud
• Identify inconsistencies between assets and official revenues
• Verify the consistency of tax returns with the taxpayer’s economic reality

How does an ESFP tax audit work?

The audit begins with the receipt of a notice of audit sent by registered mail with acknowledgement of receipt. This document specifies the years concerned, the taxes concerned and your right to the assistance of an advisor (tax lawyer or chartered accountant). A minimum of 15 days must elapse between receipt of this notice and the first contact with the auditor. During the audit, the tax authorities will examine your bank statements, major invoices and life insurance policies, and may ask you to provide proof of the origin of your funds, particularly in the case of real estate acquisitions, investments or gifts received.

Notice of verification

You will receive a notice of audit by registered mail with acknowledgement of receipt. This document specifies the nature of the audit, the years concerned and the taxes concerned. A minimum of 15 days must elapse between receipt of this notice and the first contact with the auditor.

The notice also mentions your right to be assisted by counsel of your choice, in particular a specialized tax lawyer. This procedural guarantee enables you to prepare for the audit with peace of mind, and to benefit from support from the outset.

Control operations

The auditor examines your situation in several methodical steps. He or she meticulously analyzes your bank statements for the entire period under review, as well as your major bills (work, vehicles, travel), your life insurance policies, your financial investments and all documents justifying your expenses and income. This cross-analysis provides a complete picture of your financial situation.

The tax authorities may ask you for detailed explanations of the origin of your funds, particularly in the case of real estate acquisitions, substantial investments or unusual bank transactions. In the event of significant inconsistencies that could give rise to suspicions of income concealment or tax fraud, the auditor will investigate further. You have a reasonable period of time, usually two months, in which to provide all the supporting evidence and explanations needed to understand your situation.

Duration and scope of ESFP control

The ESFP generally covers the last three years, in line with the tax authorities’ ordinary recovery period. However, this period may be extended to six years if there is a presumption of fraud or concealed activity. The audit may cover several tax categories: income tax, social security contributions, registration fees for certain transactions, and property taxes in the case of proven asset inconsistency.

Verifiable years

In the case of income tax, the tax authorities can go back up to three years. This period applies from the year in which the tax return is filed. However, this period can be extended to six years in cases of presumed fraud, concealed activity or failure to file a tax return. The statute of limitations plays a decisive role in limiting the timeframe of the audit, and constitutes an essential guarantee for the taxpayer.

Taxes concerned

The ESFP may cover several categories of tax directly related to the assets and income of individuals:

• Income tax and social security contributions: this is the main verified tax, covering all income categories (wages and salaries, property income, capital gains, income from transferable securities) as well as social security contributions (CSG, CRDS).
• Registration fees: particularly in the case of real estate acquisitions, gifts or inheritances, where the tax authorities suspect under-valuation or concealment.
• Impôt sur la fortune immobilière (IFI): in the event of inconsistency between real estate holdings and tax returns filed
• Property taxes: when inconsistencies are detected in real estate holdings

The reconstruction methods used

When faced with a discrepancy between your declared income and your lifestyle, the tax authorities use two main methods to reconstitute your income. The first, known as the “expenditure method”, consists of adding up all your expenses (rent, loans, travel, schooling) and comparing them with your declared income; a significant discrepancy may lead to a proposal for rectification. The second is based on presumptions of income based on official scales: owning a yacht, a luxury car or a second home automatically generates a presumption of minimum income corresponding to these lifestyle items.

The expenditure method

The auditor adds up all your expenses for the year: rent or mortgage payments, loan repayments, major bills (works, vehicles), travel and leisure, children’s school fees, food and clothing. This reconstitution is based on your bank statements, invoices and any other document that allows us to trace your financial flows.

The administration then compares these total expenses with your declared after-tax income. A significant difference between the two amounts constitutes a presumption of undeclared income. The tax authorities generally allow a margin of tolerance to take account of previous savings or cash flow variations, but any significant and recurring discrepancy requires precise justification on your part.

If you are unable to explain the origin of the sums that financed your expenses, this discrepancy may lead to a proposal for rectification. The tax authorities will then reinstate in your taxable income the amounts corresponding to the unjustified expenses, with the application of late payment interest and any penalties.

Presumption of income

The tax authorities can use lifestyle factors to presume a minimum level of income. This method is based on article 1649 quater-0 B ter of the French General Tax Code, which establishes official scales for certain goods and services.

Several assets generate presumed income:

• Owning a yacht or pleasure boat
• Possession of luxury or collector vehicles
• Second homes and their rental value
• Racehorses and their care
• Private planes and helicopters
• Permanent domestic employees

These scales set a presumed minimum income required to own each category of property. For example, owning a vehicle with a tax rating above a certain threshold gives rise to a presumption of income calculated on the basis of a multiplier coefficient applied to the value of the vehicle.

In the face of these presumptions, you must provide proof to the contrary by justifying the origin of the funds used to acquire or maintain these assets. You can show that these expenses came from an inheritance, a gift, a loan or previous savings. The tax authorities must then take these justifications into account when adjusting the reconstitution of income.

Your rights and guarantees during the ESFP

Throughout the ESFP procedure, you benefit from two fundamental rights: the right to legal counsel and respect for the adversarial principle. You may be assisted at any time by a tax lawyer or chartered accountant of your choice. Prior to any tax reassessment, the tax authorities must send you a detailed reassessment proposal setting out the reasons for the proposed reassessment and its legal basis. You then have 30 days in which to present your observations and contest the proposed reassessment.

The right to assistance

You can call on the assistance of a tax lawyer or chartered accountant at any stage of the ESFP audit. This assistance is particularly valuable for analyzing the administration’s requests and preparing appropriate responses.

The use of a tax lawyer offers several decisive advantages. This professional masters the procedural subtleties of the ESFP and can identify any irregularities in the conduct of the audit. He or she can help you formulate legally sound responses and assemble the relevant supporting documents within the allotted time.

The assistance of legal counsel is particularly recommended as soon as you receive the notice of audit. This anticipation enables you to prepare effectively for the audit and adopt the best defense strategy. Your advisor can also be present at meetings with the auditor to ensure that your interests are protected throughout the procedure.

The adversarial principle

The adversarial principle is a fundamental guarantee of the ESFP procedure. Before any adjustment is made, the tax authorities must send you a detailed adjustment proposal. This document sets out the precise reasons for the proposed adjustment, the legal basis on which it is based, and a detailed calculation of the duties and penalties claimed.

This proposal must be sufficiently reasoned to enable you to understand the charges against you and to prepare your defense. In particular, the tax authorities must specify the elements of your situation that they consider to be inconsistent with your declared income, as well as the reconstitution method used, if applicable.

You have a statutory period of 30 days from receipt of this proposal to submit your written observations. This period may be extended on reasoned request. During this period, you may consult your entire tax file and be assisted by an advisor. Your comments must be well-founded and accompanied by all relevant supporting documents demonstrating the validity of your position.

The tax authorities are obliged to examine your arguments and respond with reasons. If it maintains all or part of the reassessment, it must explain the reasons for rejecting your observations. This adversarial phase is essential: it enables you to contest the proposed reassessment and may lead to the total or partial abandonment of the proposed adjustments.

The consequences of an ESFP inspection

The audit can have two distinct outcomes. If the auditor finds no discrepancies, you will receive a notice of no adjustment, which definitively closes the audit for the years and taxes audited. On the other hand, in the event of a proven inconsistency, the tax authorities will proceed with a tax adjustment. Tax reminders are accompanied by interest on arrears of 0.20% per month. Additional surcharges may be added: 40% in the case of deliberate failure to comply, and 80% in the case of fraudulent maneuvers.

No rectification

If the auditor finds no anomalies at the end of his or her investigations, you will receive a “avis d’absence de rectification”. This official document is of the utmost importance: it definitively closes the audit for the years and taxes audited, thus protecting you against any further audits involving the same items and the same period.

The “avis d’absence de rectification” is a solid legal guarantee. The tax authorities can no longer call into question the elements audited, except in the event of the subsequent discovery of new elements not examined at the time of the initial audit, such as a concealed activity or concealed income not brought to the auditor’s attention.

This favorable outcome testifies to the consistency between your declared income and your asset situation. It validates the regularity of your tax returns for the period under review, and gives you considerable legal certainty. Keep this document in a safe place, as it may prove useful in the event of a future tax audit.

Tax adjustment

In the event of a proven discrepancy between your declared income and your lifestyle, the tax authorities will reassess your tax return. This procedure has significant financial consequences, and it’s important to understand what’s at stake.

Tax reminders are the first consequence of tax reassessment. The tax authorities demand the amounts that should have been paid in the years under audit. These reminders mainly concern income tax, but may also relate to registration duties or property taxes, in the event of a discrepancy being detected in the taxpayer’s assets.

In addition to these reminders, late payment interest is systematically charged at a rate of 0.20% per month, or 2.4% per annum. This interest runs from the date on which the tax should have been paid to the date on which the assessment is levied.

Depending on the seriousness of the offence, the tax bill may be increased by a surcharge. The rate of 40% applies in the case of deliberate failure to comply, when the tax authorities demonstrate your intention to evade tax. In the case of fraudulent maneuvers, i.e. when positive acts of concealment have been implemented, the surcharge can rise to 80%. In the most serious cases, involving the use of undeclared foreign accounts, the increase can even reach 100%.

When faced with a tax reassessment following an ESFP, the support of specialized tax lawyers becomes essential to contest the amounts claimed, negotiate penalties or organize a payment schedule.

How to defend yourself effectively against an ESFP

An effective defense against an ESFP inspection depends on methodical preparation and respect for your rights. Here are the essential steps to take:

• Gather together all your supporting documents: pay slips, bank statements, major bills, loan agreements, proof of donations or inheritances, etc.
• Call on the assistance of a tax lawyer as soon as you receive the notice of audit to analyze the requests and prepare your responses.
• Respond systematically and on time to the auditor’s requests, always in writing and keeping a copy.
• Document the origin of every major financial transaction, especially for major real estate acquisitions and investments.
• Dispute unjustified tax reassessments by using the channels of appeal: departmental contact, tax conciliator, then administrative court if necessary.
• Maintain a cooperative attitude while preserving your rights, because obstruction can worsen your situation.

Preparing your file

Methodical preparation of your file is the first line of defense against an ESFP audit. Complete, organized documentation enables you to respond quickly to the auditor’s requests, and to justify the consistency between your income and your assets.

Systematically collect all proof of your income: pay slips, property tax returns, tax notices, bank and savings account statements. For major expenses, keep property purchase invoices, loan contracts with amortization schedules, bank card statements and receipts for exceptional expenses.

Accurately document the origin of every significant financial transaction. Family donations must be supported by the corresponding notarized deeds, inheritances by certificates of inheritance, and sales of assets by deeds of transfer. This rigorous traceability rules out any presumption of tax fraud and demonstrates the transparency of your situation.

Organize your documents chronologically and thematically for easy consultation. This organization will enable you to respond effectively to the auditor’s requests within the allotted time, thus avoiding unfavorable interpretations linked to delays or incomplete answers.

Responding to administrative requests

The quality and speed of your responses to the auditor’s requests largely determine the outcome of the ESFP audit. Each request for justification or clarification must be given special attention and a structured response.

Scrupulously respect the deadlines set by the tax authorities, generally fixed at 30 days for requests for justification. A delay or absence of response may be interpreted as an implicit admission and reinforce the auditor’s presumptions. If you need more time to gather certain documents, ask for an extension in writing before the initial deadline expires.

Always give preference to written replies, sent by registered letter with acknowledgement of receipt or delivered by hand against receipt. This will enable you to keep a record of your exchanges and prove that deadlines have been met. Keep a copy of all correspondence and supporting documents.

Structure your answers clearly and methodically. For each point raised by the auditor, provide a precise answer accompanied by the appropriate supporting documents: bank statements, invoices, contracts, certificates. Number your supporting documents and draw up a summary sheet for easy reference.

If you’re in any doubt about the scope of a request or the information you need to provide, don’t hesitate to ask your legal advisor for help. A tax lawyer can help you understand the issues involved in each question, and formulate legally appropriate responses that safeguard your interests without compromising your credibility.

Challenging unjustified adjustments

If you consider the adjustment to be unfounded, there are several avenues of appeal open to you, according to a precise hierarchy. To maximize your chances of success, your challenge must be methodical and well-founded.

The first step is to formulate your observations in response to the rectification proposal within the 30-day deadline. Develop precise legal arguments: challenge the reconstitution methods used, provide additional proof of the origin of your funds, or demonstrate the factual errors made by the auditor. This adversarial phase is crucial, as the tax authorities may abandon all or part of the reassessment.

If the disagreement persists after your reply, you can refer the matter to the departmental contact. This hierarchical appeal allows your case to be submitted to a senior manager of the departmental public finance department. You have 30 days from receipt of the reply to your observations to exercise this right of appeal. The interlocutor re-examines your situation with fresh eyes and may propose a settlement.

In the absence of agreement with the departmental contact, the tax conciliator provides an additional means of amicable recourse. This independent figure examines disputes involving amounts of less than 100,000 euros. The conciliator encourages dialogue and seeks a fair solution between you and the administration.

If all amicable means of redress fail, you can still take your case to the administrative court. You must lodge a complaint with the administration within the legal time limit, then take the matter to court if the complaint is rejected. The administrative judge verifies the legality of the procedure, examines the validity of the adjustments and checks the proportionality of the penalties applied. This type of litigation requires the assistance of a tax lawyer to build a solid legal argument.

Mistakes to avoid during an ESFP inspection

Certain mistakes can considerably worsen your ESFP situation. Here are the main pitfalls to avoid:

• Not responding or responding late: Failure to respond to requests for justification reinforces the administration’s presumptions and may constitute tacit acceptance of the adjustments envisaged.
• Providing incomplete or contradictory documents: Inconsistent supporting documents arouse suspicion and may lead to further investigation.
• Adopting an uncooperative attitude: a hostile or stubbornly closed posture encourages the auditor to intensify his control, whereas a constructive dialogue better safeguards your interests.

Not responding or responding late

Failing to respond to the tax authorities’ requests for explanations is one of the most damaging mistakes made during an ESFP audit. Silence in the face of the auditor’s requests considerably strengthens the presumptions established by the administration, and seriously compromises your chances of defense.

From a procedural point of view, failure to respond within the allotted time has direct legal consequences. The tax authorities may legitimately consider that you do not have valid evidence to explain the origin of your income or the consistency of your financial situation. This lack of documentation authorizes the auditor to base adjustments on less favorable presumptions and reconstitutions.

Delays in transmitting requested documents are also problematic. Even if you do eventually respond, excessive delay can be interpreted as an attempt to reconstitute supporting documents a posteriori, which weakens their credibility in the eyes of the authorities. Auditors generally give more credence to prompt and complete responses than to delayed and fragmentary justifications.

In certain situations, silence implies tacit acceptance of the proposed adjustments. If you do not make any comments within 30 days of receiving a proposed reassessment, the tax authorities may consider that you implicitly accept the proposed reassessments, which considerably limits your possibilities of contesting them at a later date.

Providing incomplete or contradictory documents

Incomplete or contradictory supporting documents immediately arouse the auditor’s suspicions, and can turn a simple audit into an in-depth investigation. The tax authorities have sophisticated cross-checking tools that quickly detect inconsistencies between different documents.

The most frequent contradictions concern transaction dates, amounts declared on different media, or the origins of funds, which vary according to the supporting documents provided. For example, justifying a property purchase by a family loan in the first instance, then referring to personal savings in a second document, constitutes a major inconsistency.

To avoid this error, systematically check the temporal and factual consistency of all your documents before transmitting them. Make sure that the amounts correspond exactly from one document to the next, that the dates match, and that your explanation remains identical throughout the procedure. If you have any doubts about a document, it’s better to seek the help of counsel before transmitting it, rather than providing an element that could weaken your entire defense.

Adopting an uncooperative attitude

A hostile or obstinately uncooperative attitude may lead the auditor to investigate further and adopt a more rigorous stance in assessing your situation. This defensive posture manifests itself in a systematic refusal to provide explanations, opposition to legitimate requests for justification, or evasive and dilatory responses.

The auditor has a certain amount of discretion in the conduct of his audit. A confrontational attitude may prompt the auditor to examine certain aspects of your tax return in greater detail, to request additional information from third parties (banks, employers, notaries) or to extend the duration of the audit within the legal limits.

Constructive dialogue, while firmly preserving your rights, remains the best approach. This means responding to requests in a timely manner, providing clear and coherent supporting documentation, and asking for clarification when requests seem imprecise or excessive. This reasoned cooperation in no way precludes arguing points of disagreement, or seeking the assistance of specialized counsel to defend your interests.

The importance of specialized legal support

Faced with the technical and legal complexity of an ESFP, the assistance of a specialized tax lawyer is a decisive asset in securing your defense, analyzing the legality of the procedure and negotiating effectively with the administration, thus enabling you to significantly reduce the amount of reassessments or obtain their abandonment.