What are the warning signs that can trigger a tax audit?

 

Why are certain businesses targeted?

A business tax audit is never entirely random. While any business can theoretically be subject to a review, the reality is that the tax authorities focus their efforts on companies they deem most at risk. This selection process is based on well-defined criteria and increasingly advanced technological tools. Understanding this logic helps you anticipate situations that may require closer attention.

A targeting strategy based on risk analysis

The French Tax Authority (DGFIP) is tasked with ensuring fairness in taxation. To fulfill this mission, it directs audits toward taxpayers who may present irregularities or signs of fraudulent behavior. This targeting is based on a risk analysis that takes into account multiple factors: reporting inconsistencies, unusual behavior, or data obtained from external sources.

Since the administration operates with limited resources, each audit must be cost-effective. As a result, it prioritizes cases with a high potential for tax adjustment. This explains why even small businesses can be targeted, while others, sometimes more visible, are not.

Increasingly sophisticated selection tools

In recent years, the tax authority has adopted automated systems to detect anomalies. These systems, often referred to as “fiscal datamining”, analyze data from tax returns, bank files, social security records, online platforms, and even European databases.

Using artificial intelligence and large-scale data cross-referencing, these tools help identify risk profiles or statistical inconsistencies compared to industry benchmarks. An unusual gap between collected and deductible VAT, income inconsistent with declared assets, or excessive expenses relative to activity may trigger an algorithmic alert.

National and local control priorities

Each year, the tax authority publishes national guidelines outlining priority audit areas, which may include certain sectors, tax schemes, or taxpayer profiles. For example, targeted campaigns may focus on recipients of tax credits, family holdings, or international digital activities.

These priorities can also be adapted at the local level by regional or departmental offices, based on local economic concerns. A company can therefore be audited simply because it belongs to a sector deemed sensitive at a given time.

Targeting triggered by external signals

Lastly, some companies are selected following a whistleblower report, a partner's tax audit, or data matching with other databases (e.g., social security, customs, digital platforms). This external targeting complements algorithmic risk analysis and contributes to the enrichment of the tax administration’s data models.

Warning signs monitored by the tax authorities

Tax authorities rely on a combination of indicators when deciding whether to initiate an audit. These signals, often referred to as “risk indicators”, are drawn from your tax filings, accounting data, and cross-checked with external sources (third parties, social security bodies, banking records, etc.). Below are the main elements likely to raise red flags with the tax administration.

Unusual fluctuations in profit or revenue

A sharp increase or decrease in your revenue, profits, or turnover from one year to the next can attract scrutiny. Even if economically justified (e.g., loss of a major client, business restructuring), such changes may be interpreted as signs of concealment or aggressive tax planning. Tax authorities use industry benchmarks to identify abnormal variances.

Recurring deficits and negative results

A company that reports losses over several consecutive years may raise suspicions, especially if it continues to operate despite negative results. This could suggest an attempt to artificially reduce taxable profits or to generate fiscal deficits for the purpose of claiming tax credits or carrying forward losses.

International bank transfers

Significant transfers to or from foreign accounts, undeclared bank accounts, or cross-border financial flows can trigger an audit, particularly when they involve low-tax jurisdictions. The administration may also use the Common Reporting Standard (CRS) to access international banking data automatically.

Lifestyle not aligned with declared income

A clear mismatch between a business owner's lifestyle (luxury residence, high-end cars, expensive travel, etc.) and reported income or company results is a common audit trigger. Authorities may suspect undeclared dividend distributions, hidden compensation, or personal expenses being passed as business costs.

Negligence or irregularities in tax filings

Repeated delays, omissions, frequent amended returns, or consistent errors in filing obligations (VAT, corporate tax, CVAE, etc.) can bring your business under the tax authority's radar. This doesn’t automatically imply fraud but indicates poor fiscal management and may warrant a closer look.

Discrepancies between your returns and third-party data

Information from social security bodies, banks, digital platforms, or commercial partners is often cross-referenced with your own filings. Discrepancies between declared figures (e.g., wages, dividends, turnover) and those reported by third parties can prompt a verification check.

Abnormal margins or ratios compared to your industry

The tax authority compares your financial indicators to those of similar businesses in your sector or of comparable size. Extremely low margins, unusual cost-to-revenue ratios, or abnormally slow stock turnover can serve as red flags. Likewise, unjustified expenses or inconsistent invoicing patterns may spark further inquiry.

Errors in the accounting records file

Since 2014, any business undergoing a tax audit must submit a standard accounting file. This digital file allows for automated analysis. Technical issues (unbalanced entries, duplicate records, missing journals) or accounting inconsistencies can be easily spotted and may alone justify a more in-depth audit.

High-risk business sectors

Certain industries are traditionally seen as more exposed to tax evasion or irregularities, such as hospitality, construction, cash-based retail, liberal professions, or digital activities. Operating in a so-called “high-risk” sector statistically increases the likelihood of being audited, particularly when combined with other risk indicators.

External triggers for a tax audit

In addition to anomalies found in your own tax filings or accounting records, certain external elements can directly lead to a tax audit. These often unpredictable factors highlight the importance of maintaining rigorous financial practices at all times. Below are the most common situations where an audit is initiated based on external information.

Whistleblowing or reports

The tax authorities may receive whistleblower reports, anonymous or not, from a former employee, a competitor, a client, or a disgruntled business partner. These reports can relate to suspicious practices such as undeclared employees, fictitious invoices, or unreported activities. If the claims are detailed and credible, they may be sufficient to justify an audit. While the administration is not obligated to follow up on every report, some may lead to a review, especially if other red flags are present.

Audit of a business partner

When irregularities are found in the accounts of one of your suppliers or clients, the administration may decide to extend the audit to the surrounding business network. This ripple effect is common in matters involving intra-community VAT fraud or fictitious billing schemes. As a result, you may be audited solely because of your commercial relationship with a company already under scrutiny.

Previous tax audit

A company that has already undergone a tax audit may be audited again if unresolved anomalies remain or if no corrective measures were taken. The tax authorities may also want to verify whether prior recommendations were followed or if similar issues have reoccurred. When bad faith or repeated non-compliance is suspected, the risk of a follow-up audit is significantly higher.

Cross-border activities or links to low-tax jurisdictions

Businesses involved in international transactions, especially those linked to non-cooperative or low-tax jurisdictions, are subject to increased scrutiny. Complex tax planning structures, cash flows to offshore entities, or poorly documented transfer pricing are all classic triggers for tax audits, particularly within international groups or holding companies.

Targeted campaigns by the tax administration

Each year, the French Tax Authority (DGFIP) defines audit priorities at the national or regional level. Certain industries or tax schemes may be the focus of specific campaigns, depending on perceived risks (e.g., tax credit abuse, real estate tax optimization, shell companies). Even a fully compliant business can be selected for audit if it falls within one of Bercy’s predefined target areas.

Can these warning signs be anticipated?

While a tax audit can never be entirely predicted, many of the warning signs that trigger a review can be identified, monitored, and even corrected internally. The goal is not to eliminate all risk, an impossible task, but rather to minimize the most common triggers and demonstrate sound fiscal management. Here are the key strategies for anticipating a possible selection by the tax authorities and to avoid tax audit.

Implement internal pre-audit tools

Many businesses, particularly well-structured SMEs, conduct regular internal tax reviews. These involve analyzing key filings (VAT, corporate tax, CVAE) in light of applicable tax and accounting rules, checking data consistency, and correcting any discrepancies before submission. This process can be carried out in-house or with the help of an external tax advisor.

Monitor key financial and tax ratios

The tax administration relies heavily on benchmarking. It compares your financial performance indicators and ratios (gross margin, deductible VAT rate, costs per category, payroll-to-revenue ratio, etc.) with industry standards. Understanding these benchmarks is essential to detect anomalies and justify them proactively. By doing so, your business can preempt potential questions from the authorities.

Maintain flawless accounting practices

Sound bookkeeping is the foundation of a constructive relationship with the tax administration. This includes not only accurate entries, but also proper documentation of transactions, careful record-keeping, and a thorough command of the Fichier des Écritures Comptables (FEC). A simple technical error in this file may trigger a tax audit. It’s best to validate the FEC regularly using dedicated tools.

Stay up to date with filing obligations

Tax obligations change frequently. New forms, thresholds, tax credits, or schemes may apply without much notice. Ongoing regulatory monitoring, conducted with an accountant or tax lawyer, helps prevent omissions or mistakes linked to these changes. For example, failing to submit the DAS2 form or mishandling intra-EU VAT could be enough to raise a red flag.

Seek guidance from tax law professionals

Consulting a tax lawyer early on, not just when a control is underway, helps secure your processes and provides an expert view on potential weak points. It’s also an effective way to arrange preventive audits or compliance reviews, especially useful during periods of rapid growth, business restructuring, or international expansion.

Better understanding to better prepare

The launch of a tax audit is rarely entirely random. Behind each verification lies a logical analysis, based on concrete indicators, reporting anomalies, or external information. By recognizing these warning signs, you are better equipped to anticipate them, correct issues proactively, and reduce your exposure.

However, this preventive work does not eliminate the need to be properly prepared if a tax audit is actually initiated…

Have you identified a high-risk situation or elements that could draw the attention of the tax authorities? Sion Avocat, a tax law firm based in Marseille, assists you both before and during a tax audit to help secure your position and defend your interests. Don’t hesitate to contact us.

FAQ – Warning signs that may trigger a tax audit

What are the most common reasons for a tax audit in a company?

The most frequent triggers include inconsistencies in tax filings (VAT, corporate tax, income tax), recurring deficits, unusual fluctuations in results, a lifestyle that doesn’t match reported income, and errors in the Standard Accounting File (FEC). Being in a high-risk sector or receiving a whistleblower report can also lead to an audit.

Does a low turnover protect you from a tax audit?

No. Even micro-businesses and small enterprises (TPE) can be audited if anomalies are detected. Turnover is not an exclusion criterion. It’s the presence of warning signs, irregularities, inconsistencies, or unusual behavior, that typically prompts a review by the tax authorities.

Can the tax authorities cross-check my data with other organizations?

Yes. The tax administration uses datamining tools to cross-reference your declarations with external databases such as URSSAF, banks, notaries, social security bodies, and digital platforms. These comparisons can reveal discrepancies or omissions that may trigger an audit.

Can a tax audit be triggered by a whistleblower?

Yes. Even an anonymous report can lead to an audit, especially if the claims are credible and align with other risk indicators. While the administration is not required to act on every report, it does take them into account when they appear substantiated.

How do I know if my business is in a high-risk sector?

Sectors deemed “sensitive” vary year to year, but commonly include construction, hospitality, liberal professions, cash-intensive businesses, and international operations. It’s advisable to stay informed about the audit campaigns published annually by the French tax authority (DGFIP).

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