Accounting audits

What are accounting audits?

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Accounting auditing is a fairly common type of audit, which allows an administration to carry out an on-site inspection of a company’s accounts.

This type of audit mainly affects trading companies, but it can also relate to a real estate company liable for VAT but only with respect to VAT.
The so-called transparent real estate holding companies, subject to income tax, are not obliged to keep accounts, so an audit of this type of company’s accounts seems to be prohibited. However, the Council of State (CS order dated 5 November 2014, No. 356148) has admitted on several occasions that an SCI (real estate holding company) that is subject to income tax may be subject to an on-site inspection of its documents if the SCI provides leasing or confers the enjoyment of properties owned by its shareholders, this check, which is similar to an audit of accounts yet has a different legal basis.

The purpose of an accounting audit is to check the existence and veracity of tax declarations issued by the company, this audit makes it possible to audit financial statements with respect to accounting items and accounting documents issued by the company. Thus, it will be necessary to submit these items and accounting documents to the auditor during the audit, these items should allow the auditor to understand how the balance sheet was drawn up and how certain choices were made (e.g.: provision for charges, choice of a linear depreciation rather than decreasing).

In the event of inaccuracy or error, the tax authorities may proceed to request a back payment of taxes by the audited company.

Obviously this audit can not be carried out without real guarantees for the audited taxpayer, that is why a panel of guarantees is attributed to the taxpayer subjected to an accounting audit, some of these guarantees are set out in article L 47 of the LPF (Book of Fiscal Procedures).

For example it has been stated that:

  • An audited taxpayer must, at the time of sending or delivering an audit notice, obtain the charter of the rights and obligations for the audited taxpayer, if this person does not receive the notice personally, it must include a statement setting out precisely where the taxpayer can obtain this document, this information must be transmitted to the taxpayer before the date of the beginning of the audit operations.
  • An audited taxpayer must be informed of any opportunity to be assisted by an advisor.
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Other guarantees are also provided, these relate to the course of the audit procedure but also to any corrections, it may relate to:

  • The fact that the taxpayer must be informed of the results of the audit operation;
  • The possibility for the taxpayer to appeal against any corrective decision;
  • The impossibility for the tax administration to conduct a new tax audit on periods and taxes that have already been checked.

However, the tax administration may re-inspect the same taxes for a period other than the one that has already been checked, provided that this period is not statutorily time barred.

One change should be noted involving tax audits by auditors, in fact in recent years the tax administration has asked its auditors to listen to audited taxpayers and to answer any questions. The audited taxpayer must have the right to an oral and contradictory debate with the auditor. The establishment of a relationship of trust has greatly contributed to this.

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If such guarantees are provided it is because the tax administration has a certain number of prerogatives in the event of conducting an accounting audit, it has a right of communication (particularly with third parties), this provision being provided for in article R13-1 of the LPF (Book of Fiscal Procedures).

With respect to an accounting audit, this procedure is conducted over several stages, initially even before deciding that an accounting audit will be carried out, the auditor shall collect a number of items. For this end, it will examine the files made available to the tax administration (tax declarations, e.g. annual tax returns, annual salary declarations, tax on company vehicles, VAT declarations, annual corporate documents such as minutes, reports of previous audits if there are any, local tax notices etc.).

The auditor will then conduct external research. The auditor may use its right of communication with various organisations (URSSAF (the Organisations for the payment of social security and family benefit contributions)  banks, employment hub etc.). Pursuant to this right of communication, the auditor can even interview individuals in accordance with certain conditions, again certain guarantees are provided.

If these first elements suggest that there are discrepancies between the tax declarations that were issued and the company’s accounting items, it may decide to carry out an accounting audit.

The taxpayer will then be informed by an audit notice that it is the subject of an accounting audit, this notice will set out the period and taxes to be audited, this notice must include the various guarantees mentioned above (right to be assisted by an advisor, we strongly advise you to be assisted by an advisor, information on the charter of the audited taxpayer etc.).
The audit notice must not be issued at the time of the audit, it must leave a certain amount of time before the inspection operations begin so that the taxpayer can collect the accounting documents and ask for assistance, if necessary from an advisor,

It is acknowledged that the postponement of any date for an accounting audit may be granted to a taxpayer when it indicates real and serious causes, this right which is guaranteed to the taxpayer is set out in the administrative doctrine BOI-CF-PGR-20 -10-20171004 at § 120.

The audit procedures may be conducted at a company’s registered office, at the company’s accountant’s premises, at a location where all of the company’s items and accounting documents are located. The auditor shall inspect the site to verify all of these documents. This type of audit differs from an accounting review.

An accounting review is an audit that allows the tax administration to carry out an audit without travelling to the company’s premises, it will just have to transmit paperless documents to the tax administration in the form of a an extractfrom their accounting system in the form of a fichier des écritures comptables (FEC) or a standardised file ofaccounting entries. This other type of audit must also give a taxpayer the right to a mutual and oral debate between the audited taxpayer and the tax authorities.
It should be noted that the FEC sent by the taxpayer as part of an accounting review is identical to the one submitted in the event of an accounting audit.

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Thirdly, the consequences of the accounting audit take place at the end of the audit operations. The auditor makes a report of the status which it will send to its supervisor(s).

If no correction is required as a result of the audit operations, the audit operations are closed and the audited taxpayer shall receive a notice of non-correction. The auditor may suggest proposals for correction to the audited taxpayer, who may agree with the taxpayer or refuse to accept them.

The auditor may impose penalties on the audited taxpayer.

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Corrections may relate to:

  • The figures in the filed declarations;
  • The declared profits and therefore the distributions that were made.

The auditor will rectify these amounts when noting:

  • An error or discrepancy on matters of principle (unjustified provisions under the tax law, maintenance in non-deductible taxes, etc.) ;
  • Material errors or inaccuracies (postponement errors, incorrect entries, etc.) ;
  • Shortfalls (lack of inventory, lack of supporting documents for some transactions, etc.) ;
  • Irregularities (concealment of profits, reduction of purchases, etc.).

Obviously if errors are acknowledged by the auditor but which are unfavourable to the taxpayer, for example, the taxpayer has not entered charges that could have reduced the amount of the the taxpayer’s profit and thus reduce a company tax liability, the auditor must inform the audited taxpayer.

How can we help?

 

Contact Maître Benjamin A. Kergueno, Attorney at Law today if you are dealing with issues related to real estate law in France and on the French Riviera.

Maître Benjamin A. Kergueno, LL.M will provide you with a full set of informations and with the adequate counsels for sorting it out.

For more information or to schedule an appointment with an experienced lawyer regarding real estate law in France, please contact us.

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