DETECTION OF TAX

FRAUD BY INDIVIDUALS

Methods undoubtedly modernised, but results still

inadequate

Public thematic report

Executive Summary

November 2023

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Executive Summary

The topic of detecting tax fraud by individuals was selected as part of the citizen

consultation launched by the Court of Accounts in 2022 to contribute to the work programme

of the financial jurisdictions.

Meanwhile, in June 2023, the government published a national plan to combat tax fraud,

structured around 35 measures. Apart from the fact that these measures are aimed more at

businesses than individuals, the plan does not specifically refer to the detection of fraud,

although the four measures designed to equip the tax authorities for the digital world are partly

covered.

However, detecting tax anomalies and irregularities is the first link in the overall policy to

combat fraud. It precedes - and determines the effectiveness of - the audit phase, at the end

of which taxpayers who are found to have committed fraud will have to pay tax arrears and

penalties.

In accordance with the request made to the Court, this report deals only with taxes paid

directly by individuals. These taxes accounted for more than €160

billion in 2022, or 30 % of

net tax revenues collected on behalf of all public administrations (the State, local and regional

authorities and other public bodies). These include income tax (€88.9 billion collected from

18.5 million households), tax on inco

me from transferable securities (€4.0 billion), property

wealth tax (€2.4 billion) and inheritance and gift tax (€18.6 billion) in taxes paid to the State,

as well as property taxes (€28.3 billion), council tax on second homes (€2.3 billion) and

property t

ransfer taxes (“notary fees”, €16.1 billion) paid to local authorities.

Major taxes such as value added tax (VAT) or even the generalised social contribution

(Contribution Sociale Généralisée, CSG) are legally payable by individuals, but in practice they

are assessed and collected without their involvement (by businesses in the case of the former,

by employers in the case of the latter), which explains why they have not been included in the

scope studied here.

Tax fraud: a phenomenon that is not measured and is often confused with

other methods of tax avoidance

The term ‘tax fraud’ is not always used rigorously, particularly when it is used generically

to describe all actions that have the effect of reducing the amount of tax paid. As the diagram

below illustrates, several phenomena (tax optimisation, unintentional irregularities, taxpayer

insolvency, etc.) have the same result without, however, constituting irregular conduct.

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Optimisation, evasion, fraud, unintentional irregularities: the phenomena that reduce

tax yields

Source: Court of Accounts

Tax fraud: a phenomenon that has not been quantified and is often

confused

with other methods of tax avoidance

Tax fraud is defined by Article 1741 of the French General Tax Code (CGI) as a

deliberate violation of tax regulations, which implies an intentional omission on the part of the

taxpayer in their reporting obligations, a concealment of all or part of the sums subject to tax,

the fraudulent organisation of their insolvency or any other act intended to hinder the recovery

of tax.

Fraud is a criminal offence punishable by a fine of €500,000 and five years’

imprisonment.

Tax fraud, combined with unintentional irregularities and sums claimed by the tax

authorities but not recovered, corresponds to the “tax gap”,

which refers to the difference

between the amounts actually collected and those that would result from strict application of

tax regulations with no disruption.

A regrettable and persistent lack of estimates of tax evasion, with very

broad and imprecise measurement

Unlike many countries, France has no rigorous assessment of tax fraud or even of the

tax gap. The amount of each of these two phenomena, even when reduced to a rough

approximation, is unknown. The only known amounts are those claimed by the tax authorities

after an audit, i.e. a total of €14.61 billion in 2022, divided between €11.95 billion in evaded

taxes and €2.66 billion in penalties, around 1/5th of these sums being paid by individuals and

4/5ths by businesses and professionals.

A method as rudimentary as extrapolating to the French situation the tax gap observed

abroad (4.5 % in Estonia for the lowest, 16.6 % in the United States for the highest) would only

result in an extremely wide range, between €30 and €100 billion for all taxes

combined, or

between €7 and €27 billion for personal income tax alone, without it being possible to

distinguish fraud from involuntary irregularities and unrecovered sums.

This situation makes it impossible to relate the amounts detected or actually claimed to

the estimated amounts of fraud or of the tax gap in order to assess the effectiveness of the

tools used. The sums claimed as a result of tax audits can be traced and their evolution over

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time measured, but it is impossible to state with any certainty the proportion of actual fraud that

they help to counter.

Detecting tax anomalies and irregularities, prior to tax audits

The detection of tax anomalies and irregularities refers to all the operations that make it

possible to detect them, whether they are the result of first-level checks carried out by tax

officials or, as is now mostly the case, automatic controls based on the mass processing of tax

data. In addition, there are the various methods of collecting and processing information

received by the tax authorities (through whistleblowing, investigations, information provided by

other French or foreign authorities, etc.).

This detection phase is likely to lead to a first level of exchanges between taxpayers and

the tax authorities and to the correction by the former of their initial declarations. Since the end

of the 2010s, it has also been used as the basis for scheduling the formal documentary and

on-site audits to be carried out by the specialist services.

Focusing on detection, this report deals only incidentally with the phases of audit and

recovery of evaded duties and taxes, which take place after the phase of detection of presumed

irregularities.

Marked improvement in detection tools during the 2010s

During the 2010s, new impetus was given to the fight against tax fraud, with the aim of

systematically detecting reporting anomalies and irregularities through the use of new

technologies.

In this respect, the Directorate General of Public Finances (DGFiP) has developed tools

to make massive use of the data held by it or provided by other administrations to identify

inconsistencies with the returns filed by individuals. In 2022, this mass cross-referencing of

data resulted in 155,000 proposals for audits of individuals, three times more than in 2018.

More generally, the scheduling of tax audits, which was historically based on the highest-

value cases - i.e. those involving the largest taxpayers - has changed radically. It is now largely

based on risk analyses fed by mass data processing.

In addition to

this “technological strategy”, the tax authorities have endeavoured to step

up the collection of information that will enable them to identify both sophisticated cases of

fraud, for which no declaration appears to be inconsistent in itself, and new cases of fraud that

have not yet been the subject of a significant risk.

This dual approach has been made possible by the acceleration of international

cooperation, by the continuous increase in the data available to the tax authorities (DGFiP)

and by the improvement in the processing capacity of the latter.

A consequence of the expansion and automation of detection techniques:

a system that better protects individual rights and freedoms

The technologies used to detect tax irregularities in individuals are potentially intrusive.

As a result, new provisions have been introduced by the legislature and the courts to protect

taxpayers’ rights.

The Constitutional Council has long recognised that the fight against tax fraud is an

objective of constitutional value, in respect of which the legislature is free to make adjustments

to individual rights and freedoms. However, in view of the challenges posed by technological

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developments, it has been necessary to tighten the framework for the powers of the tax

authorities from the outset of the audit phase.

Today, the resources deployed by the tax authorities must comply with the principle of

proportionality, which ensures that the infringement of citizens’ rights and freedoms is not

disproportionate to the aims pursued, and with the personal data protection regime.

For example, mass data cross-referencing methods may only be used as tools to assist

with audits and may under no circumstances lead to the automatic identification of fraud. The

exercise of the right of communication for general detection purposes (for example through the

use of detailed records of calls made by private individuals, known colloquially as “fadettes”)

has been restricted. Finally, the automatic extraction and processing of the content of certain

social networks has been limited to pages made public by Internet users in order to respect

the right to privacy and freedom of communication.

Fraud detection methods whose effectiveness is difficult to assess due to

lack of quantification

In the absence of statistical estimates of tax fraud, it is impossible to establish what

proportion of it is detected, and whether this proportion has increased in recent years with the

implementation of more powerful tools. This is a major shortcoming that must be remedied: it

is the first of the priorities proposed by the Court below.

It is also difficult to assess the impact of the new detection tools on the effectiveness of

tax audits, and in particular on the relevance of the scheduling of audits.

The DGFiP’s activity indica

tors and benchmarks relate to the audits carried out and do

not establish a link between the reasons for scheduling these audits and their results. The main

IT systems used by the DGFiP (ALPAGE and ILIAD), which ensure the traceability of control

actions, were designed with a priority focus on monitoring the amounts to be adjusted following

audits, rather than monitoring their relevance. The reasons for audits are not sufficiently

detailed and are not linked to the breaches detected, hindering a rigorous assessment of the

effectiveness of the entire process (detection, audit, adjustment, recovery) related to tax

evasion. However, this gap is now being filled by the development of new IT systems that

should enable this link to be made.

Tax audit data show that the proportion of fraud cases or cases subject to reassessment

within the total number of cases audited has remained at around 55 % since 2018, which

prevents us from concluding that there has been a marked qualitative leap in the audit strategy.

With regard more specifically to the detection of tax irregularities in individuals through

the cross-referencing of mass data, 27 % of the audits carried out will result from this in 2022.

Carried out by a team of seven agents, the productivity gains associated with the cross-

referencing of mass data are likely, although they cannot be quantified, due to the lack of

precise data on the jobs allocated to detection over the period 2017-2021.

Finally, the increased use of “tax intelligence”, which consists of using

information

communicated by third parties, is showing clear results. This is particularly true of tax

informants, the term used to describe people who report potential fraud to the DGFiP in return

for remuneration. They have made it possible to recover €11

0 million in four years since 2018,

compared with the €1.8 million paid out to them in compensation.

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A formalised and better-structured strategy for detecting tax irregularities

among private individuals, to be implemented around six priority areas

Steps in risk management

The national anti-fraud plan presented by the French government in June 2023 is based

on 35 operational measures covering a range of issues. However, this ambitious plan does not

deal with the detection of tax irregularities as such. Nor does it clarify the principles and

resources mobilised by the tax authorities, since it returns to the forefront a number of practices

(targeting the largest taxpayers) or concerns (the number of tax audit staff) that the strategy of

the 2010s had replaced with other, more relevant matters.

This plan, provided that it is further defined and extended, is nevertheless an opportunity

to structure and formalise a genuine strategy for detecting tax irregularities, serving as the

basis for and initial phase in the policy of combating tax fraud. This strategy must be

comprehensive and structured, and must remedy the piecemeal progress and opportunities

that have characterised recent years. It could be based on six priorities, which are reflected in

the six recommendations made by the Court of Accounts.

Transparent presentation of tax audit choices and practices, ensuring equal

treatment of taxpayers

There are several possible approaches to detecting tax irregularities. It may target major

taxpayers, taking the view that they account for the majority of the budgetary implications, even

if their numbers are small; this was the approach that prevailed in the past, with the systematic

three-yearly audit of so-

called “high or very high stakes” cases. Alternatively, it may

be based

on risk analysis to maximise the yield from tax audits; this is the approach that has prevailed

with the mass cross-referencing of data since the middle of the 2010s. Lastly, the audit strategy

may leave room for random selection, which would reflect a form of equal probability of being

audited; this is not currently the case, as the tax authorities believe that such a rationale would

mean devoting resources to files that are predominantly compliant, at the cost of reducing the

audit yield.

Formalising a strategy for detecting tax irregularities would make it possible to clarify the

place reserved for each of these approaches and to allocate the resources assigned to the

audit according to transparent, clearly formulated and stated objectives. It would also be the

vehicle through which the tax authorities would present the conditions for the deployment and

use of their technological tools throughout the country, in particular by eliminating the

exceptions that persist today (for example in Corsica and the overseas territories with regard

to the detection of undeclared buildings using aerial views).

A need for statistical estimates of tax evasion

The tax authorities must catch up with many of their foreign counterparts by estimating

the amount of tax evasion, or the tax gap, for each of the major taxes.

The DGFiP plans to complete such estimates by 2027, using rigorous modelling based

on the VAT experiment that was successfully completed in 2021 and 2022. The complexity of

personal taxation must not lead to delays in these estimates.

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More cross-functional IT systems to improve data flow within the administration

The siloed design of the IT systems used by the tax authorities, specialised by tax or by

function (management of returns, audit, collection, etc.), is a weakness that has been identified

for several years. The tax administration is working hard to remedy this, with several projects

to modernise or overhaul its major applications due to be completed in the short to medium

term.

In this regard, the Court’s recommendations focus on two aspects: ensuring the

traceability of the administration’s actions, from the receipt of taxpayers’ returns (which is the

responsibility of the tax management departments) to the tax audit and its follow-up, in order

to monitor and evaluate the relevance and effectiveness of these actions on an ongoing basis;

and introducing more cross-functionality into the applications to facilitate an overall

understanding of the past and present situation of taxpayers, which is currently still broken

down by tax or territory.

Expand the tax intelligence policy

Effective detection also requires better gathering and processing of tax intelligence

(reports from judicial or police departments, whistleblowing, information from foreign

administrations, etc.) to identify fraud schemes as early as possible. However, the involvement

of these services and the procedures and tools for sharing intelligence within the tax authorities

appear to be inadequate. The anti-fraud plan presented in 2023 makes general provision for

increased use of tax intelligence, mainly from an international perspective, without specifying

how this is to be achieved.

A more structured approach needs to be put in place to improve the sharing of tax

intelligence, to ensure that it is followed up and to draw conclusions from it. One of the aims of

this approach should be to develop cooperation between tax management departments and

tax audit departments in order to monitor and exploit the mass of information at their disposal.

A proactive prevention approach aimed at taxpayers

The current fraud prevention approach is primarily aimed at businesses. It takes the form

of information and support systems, based on a map of abusive practices and arrangements

that is kept up to date and published on the impots.gouv.fr website.

The tax authorities have other opportunities to provide taxpayers, particularly private

individuals, with information and prevention messages. As in most OECD countries, the tax

authorities are taking advantage of the growing dematerialisation of their dealings with

taxpayers, particularly when they file their tax returns online, to develop tools for raising

awareness and analysing risks in real time, in the form of pop-up windows. These pop-up

windows alert taxpayers to potential inconsistencies or breaches that could give rise to a

subsequent audit. Strengthening this approach would increase the number of alerts issued to

taxpayers acting in good faith, deter certain minor frauds (e.g. tax reductions and credits) and

improve the quality of relations with the public.

Greater recognition of the specific skills and professions involved in combating fraud

required in human resources management

The technological strategy deployed in the 2010s was not accompanied by a precise

identification of the specific skills required to detect tax irregularities. There is a lack of data to

assess training efforts in this area. In addition, the DGFiP’s human resources management,

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from recruitment to career management, consistently favours cross-functional skills, without

clearly indicating the place given to specific skills related to the fight against fraud and, in

particular, to detection, for which there is no recognised role within the tax administration.

Implementing a policy of attracting and retaining staff specialised in detecting tax fraud

is therefore a major challenge if the strategy that the Court is calling for is to be formalised over

the long term.

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In the 2010s, the tax authorities took advantage of the possibilities offered by the

dematerialisation of tax management to develop powerful tools for detecting anomalies in tax

returns and tax irregularities. These tools have profoundly changed the way tax audits are

planned, moving away from an approach that targets the largest taxpayers to one based on

risks identified by the mass processing of data collected. However, these tools have not been

integrated into an explicit fraud detection strategy. This is evidenced by the fact that fraud in

the various taxes is still not statistically estimated using tried and tested methods, making it

impossible from the outset to decide on the best allocation of resources and the effectiveness

of the systems deployed. In fact, this report notes that the relevance of tax audits has improved

over the last five years, a sign of more effective upstream detection, but there is a lack of data

to support and quantify this progress more precisely.

The national anti-fraud plan presented by the French government in June 2023 is an

opportunity to specify and formalise a detection strategy, although none of its 35 measures

deals directly with this issue. The Court’s insistence on the need to formalise this strategy and

make its main aspects public is a response to a public issue that goes beyond questions of

efficiency and the appropriate allocation of resources. At a time when public debate sometimes

leaves room for suppositions, approximations and even untruths, it is the responsibility of the

tax authorities to explain who they are auditing and why, on the basis of what risks, and with

what balance between the power of the technological tools at their disposal and the protection

of taxpayers’ rights. Only then will it be possible to strengthen tax compliance, which is the

cornerstone of the Republican Pact.