For corporate welfare queens that know how to leverage worldwide tax systems, France offers a free ride. But as the French government tries in a vain and desperate effort to make ends meet, it’s not only going after multinationals and their tax optimization schemes but also smaller companies that are gasping for air.

It didn’t help that Budget Minister Jérôme Cahuzac, an integral part of France’s high-tax strategy to whittle down its budget deficit, is suddenly under official investigation for “tax fraud laundering.” The crime, worse than plain-vanilla tax fraud, has two steps: committing tax fraud and acquiring with this money assets that can be sold legally. If it can be proven that he laundered his tax fraud habitually, he faces up to seven years in the hoosegow and up to €1 million in fines.

But even for corporate welfare queens, it’s getting complicated. Raids on internet companies have become media fodder. Microsoft, Yahoo, Amazon, and eBay were all raided, some with a very photogenic display of force. Google got tangled up when tax authorities raided Groupe Partouche’s online gambling operations and found invoices from Google. Not much later, they raided Google’s offices in Paris, suspecting it of selling online ads to French companies but declaring revenues from those transactions in low-tax Ireland instead of France.

“I am very proud of the structure that we set up,” explained Google Chairman Eric Schmidt when it became known that Google might have to pay €1.7 billion in back taxes and penalties. “We did it based on the incentives that the governments offered us to operate,” he added. “It’s called capitalism.”

“These optimization schemes are expanding from large companies to smaller ones,” Alexandre Gardette told the French paper, Les Echos. He’s the director of tax audits at the DVNI, the Finance Ministry’s Directorate of National and International Audits, responsible for auditing the 3,500 largest French companies.

Tax revenues have become such a priority that the Finance Ministry’s Directorate General of Public Finances (DGFiP) has a growth target for back taxes and penalties in its three-year plan: haul in €1 billion more in 2013.

“The prior government put emphasis on social fraud,” said an advisor to Budget Minister Jérôme Cahuzac, about Nicolas Sarkozy and his government who were, in their conservative manner, chasing after welfare fraud and the like. “That’s still a target for us, but we’re aiming more at tax fraud,” the advisor said. “The orders of magnitude are not the same!”

Companies defend themselves the best they can. Les Echos tells the story of a “famous” photo at the DVNI. It shows several pallets of paper stacked 1.5 meters high (4 ft. 11 in.). Behind them, but invisible, is a short female auditor from the DVNI. She’d asked the company to deliver its accounting documents in electronic form. The company refused, and delivered everything on paper. But the vise tightened. Language was included in the budget passed in late 2012 that forces companies to deliver their documents in digital format.

Other companies might not allow an auditor to make copies of documents, claiming that they contain trade secrets, and so the auditor has to copy the document by hand— for example, a long contract in a foreign language. “It’s a bell curve,” Olivier Sivieude, director of the DVNI, told Les Echos. The majority of the companies were cooperative, but sometimes “it’s a little difficult.”

From the companies’ point of view, it’s getting worse, lawyers and executives complain. “Above all, don’t quote me,” they told Les Echos. “The relationship is so tense….”

“It’s harder and harder to arrive at a compromise with the tax administration,” said one of the lawyers. Audits aren’t more frequent than before—every three years on average for a large company. But they’re more difficult and contentious, he said. And there are more formal adjustments. For example, a company that hasn’t submitted a certain form is sanctioned; auditors are systematically looking for missing things. “Before, they pointed at the missing entry and expect a correction the next time,” a former tax inspector said. “Today they slap on penalties. That brings in money directly.”

Penalties used to be applied only to cases of “willful conduct,” but now they’ve become systematic. Some tax experts see in them a negotiating technique used by the government to reach its goals. “It’s not far from blackmail,” said one of them, convinced that tax inspectors had numerical targets.

Pre-audit search warrants and raids are also more frequent, not only at a few highly visible internet companies. They allows tax inspectors to obtain emails of top management, for example, and use them to enhance audit results.

“Before, you almost never saw any raids,” explains Gianmarco Monsellatto, a lawyer at Taj, one of the major French law firms. “Today they’ve become much more common.” Including raids at the home of executives of family enterprises. So Taj set up a 24-hour hotline for clients who get caught up in a surprise raid.

From the government’s point of view, the strategies have been successful: last year, on-location audits raised 14% more in revenues—back taxes and penalties—than the year before. One of the few gloriously successful growth industries in France.

Prime Minister Ayrault himself presided over the meeting of the National Anti-Fraud Committee. “A first for a head of government,” he said at the press conference, to hammer home just how important this was. But he wasn’t worried about run-of-the-mill fraud that might fleece an old lady of her life savings. He was worried about people not paying their taxes. And he had a remedy. Read…. Draconian Cash Controls Are Coming To France.

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