A record number of fraudsters were identified in 2023 as the government ramped up its efforts to fight tax evasion. With the crackdown set to continue, we look at eight circumstances that can spark a tax investigation in France.
The amount of money reclaimed linked to fraud tax has increased dramatically in the past three years: from €10.7billion in 2020 to €14.6billion in 2022 and up to a record €15.3billion in 2023 - a year in which tax investigations increased again by 25%.
However, an estimated €100billion is still lost to state coffers each year due to tax fraud, according to the tax inspectors’ unions.
“We would rather increase the pressure on fraudsters than increase taxes for everyone else,” announced Prime Minister Gabriel Attal on March 20, as he presented the government’s targets to fight fraud.
“Every euro lost to fraud will have to be paid back in one way or another to finance our public services, our social model and our sovereignty.”
Mr Attal added that 350 more tax inspectors will be hired in 2024, up to a total of 1,000 by 2027.
These inspectors have a growing number of ways to identify fraud, including artificial intelligence software to scan aerial photos of property to look for new extensions or pools that have not been declared and access to social media profiles to detect incongruously lavish lifestyles.
What else are tax inspectors looking for?
Not declaring foreign accounts
Any foreign bank accounts that you have available for your use should be declared to the French tax authorities each year as part of your tax declaration, even if you do not receive money into these or take any out. This is so the French officials are aware of these accounts, not necessarily to be taxed on the money in them.
Dramatic changes in income
If your income appears to go up and down in an irregular and unexplained manner, it may attract the attention of the tax authorities, even if the changes are due to a legitimate reason.
The inspectors will ask why your income has fluctuated, and are likely to pay particular attention to income from rents, dividends and real estate sales.
Read also: Payouts of up to €1m given for informing French tax office of frauds
Loans between family members
Financial dealings between family members are another red flag. Tax inspectors are aware that loans between family members - with flexible repayment - are often a way of disguising a (taxable) gift.
All large gifts, outside normal presents, can be taxable under droits de donation. If you lend €5,000 or more in a given year, including in several amounts or to different people, you are expected to declare this loan to the tax office, if the recipient has not done so.
Otherwise the loan may be considered as a gift. For more information see the service-public website.
However, there are generous tax allowances between family members, for example:
- A parent can gift their child up to €100,000 every 15 years
- Grandparents can gift their grandchild up to €31,865 every 15 years
- Partners (married or pacsed) can give each other up to €80,724 every 15 years
Read more: How can I lower the ‘gift’ tax on a present to a relative?
A main home which is not really your main home
If you put your main residence on sale but the process drags on for too long and you have stopped living there for too long, the tax authorities can refuse to class it as your principal residence. This makes the property liable for capital gains tax (CGT).
This might happen, for example, if someone moves away quickly for work and leaves the property before they have a chance to put it on the market.
In addition, if you work from home and have declared to the tax office that part of it is being used for professional purposes, you should also declare this when the property is sold otherwise the tax office could query why it is being sold solely as a residence (with exemption from CGT).
False expenses claims
This issue particularly affects self-employed workers using the réel (real expenses) tax system, offsetting professional expenses linked to their business activities to reduce the amount of tax they have to pay.
Exaggerating the amount paid out for these expenses can trigger a tax inspection, so you should take care to keep a detailed record of your accounts.
Not adjusting property values for the IFI
People with a real estate portfolio that is worth more than €1,300,000 are liable to pay French property wealth tax, L'impôt sur la fortune immobilière (IFI).
Since it is the taxpayer’s responsibility to make an IFI declaration and give the value of their property, they must be careful to adjust this appropriately each year. The tax authorities will cast a cold eye on property values that stay the same year after year.
So, if you are an IFI wealth tax payer, take care to give a ‘reasonable’ market valuation of your holdings.
Increasingly, tax offices are making checks, especially when properties are passed on or sold, to see if they have been valued realistically.
Rather than sell or otherwise pass on a property that has been undervalued, it is best to own up to a mistake. Tax office’s are generally lenient towards people making genuine mistakes especially if made for the first time.
Renting out a furnished property owned through a Société civile immobilière
If you part-own a property via a Société civile immobilière (SCI) – which enables the management of a property which is owned jointly and can reduce tax liability – you should take care if you decide to use it for commercial purposes such long-term furnished rentals.
In this case if the SCI has been subject to income tax as opposed to corporation tax, it should be changed to the latter instead, to do furnished rental in the name of the SCI.
An alternative is for the SCI to rent the property out unfurnished to another entity.
This could either be the shareholders as private individuals or a business. Either of these could then offer furnished rentals.
If you do neither, then you risk being penalised.
Maintenance payments to family members
Parents are obliged to give financial support to their children - and children to their parents. However, the person concerned must be in genuine need for basic essentials.
If you claim a deduction from your taxable income for maintenance payments to family members who have incomes above the minimum wage, the tax authorities are likely to judge the deduction fraudulent.
If you would like to learn more about income taxes in France, The Connexion has published its 80-page Income Tax in France 2024 available here.
Read more:
How do tax inspections work in France, are foreigners more at risk?
