Tax Audit and Investigation

1. Tax audit vs Tax investigation

Tax Audit

A tax audit is a routine examination conducted by tax authorities to ensure compliance with tax laws. It involves reviewing your tax returns and supporting documents. The main goal of a tax audit is to verify the accuracy of your tax reporting and ensure tax compliance. There are two types of tax audits: desk audits and field audits. Desk audits involve reviewing requested supporting documents, while field audits are conducted at the taxpayers’ premises.

Tax Investigation

On the other hand, tax investigations are conducted by tax authorities to review taxpayers’ financial affairs. They are a more severe measure to ensure compliance with tax legislation. Taxpayers can be audited at any time to verify tax reporting and payments. IRB investigation officers visit business premises, residences, tax agents’ premises, and other targeted industries.

It’s important to note that tax audits have a limited review period, while investigations have no time limitation. However, investigations typically cover five years of assessment based on the IRB’s current practice.

2. Process flow of tax audit & investigation

Tax Audit – Pre-Audit Stage

The process flow of tax audit in Malaysia typically starts with case selection, which is Pre-Audit Stage. Once your file is selected, the Inland Revenue Board (IRB) will notify the taxpayer to request for documentation. The entire review process can take up to three months before finalization. Case selection for tax audit purposes is done via the IRBM’s computerized system based on the risk profile analysis, third party information, specific category of industries, targeted group of taxpayers or locations.

In addition to the aforementioned information, it is important to note some common triggering points that may initiate a tax audit. These include:

• Significant fluctuations in income or expenditure, which may raise suspicion and require further examination.
• Failure to submit tax returns, which is a serious offense and can lead to increased scrutiny from the tax authorities.
• Spending that is not commensurate with the reported income, which may suggest undisclosed sources of income or improper deductions.
• Businesses with constant losses, which may indicate potential tax evasion or other irregularities.

Tax Audit – Field Audit stage

Which audit officers will have interview with taxpayer. The purpose of an interview is to enable the audit officers to meet the taxpayer, obtain an overview of the taxpayer’s business activity and to discuss the audit. The taxpayer will be asked to explain his business activities, accounting and record keeping system. During the audit process, the person responsible for the handling of taxpayer’s business records will also be interviewed.

Tax Audit – Post Audit Stage

Upon completion of tax audit, the audit officer will prepare an audit findings report for approval by the Branch Audit Manager. And taxpayer will be given 21 days to respond or appeal by submitting an official objection letter with relevant evidences. If no objection is made within 21 days from the date of notification of proposed tax adjustments, the taxpayer shall be deemed to have agreed to the proposed tax adjustments.

Tax Investigation

On the other hand, tax investigations are conducted by tax authorities to examine or review taxpayers’ financial affairs. The process and procedures involved in tax investigations may vary depending on the jurisdiction and specific circumstances. Here is a general overview of tax investigation procedures:

1. Initiation of Investigation: Tax authorities may initiate a tax investigation based on various factors such as suspicious activities, non-compliance, or random selection.
2. Notification: If selected for a tax investigation, the taxpayer will receive a formal notification from the tax authorities. The notification will outline the scope and purpose of the investigation.
3. Gathering Information: The tax authorities will gather relevant information and documents related to the taxpayer’s financial affairs. This may include tax returns, financial statements, bank statements, invoices, and other supporting documents.
4. Interviews and Interrogations: Tax investigators may conduct interviews or interrogations with the taxpayer, their representatives, and other relevant parties. These interviews aim to gather additional information and clarify any discrepancies.
5. On-site Visits: In some cases, tax authorities may conduct on-site visits to the taxpayer’s business premises, residences, or other relevant locations. These visits allow them to verify the accuracy of the provided information and gather further evidence.
6. Data Analysis: Tax investigators will analyze the gathered information, including financial records, transactions, and any inconsistencies or anomalies detected during the investigation.
7. Assessment and Findings: Based on the analysis, tax authorities will assess the taxpayer’s tax liability and determine if there are any underreported income, tax evasions, or other irregularities. They will prepare a report outlining their findings.
8. Resolution and Penalties: If tax irregularities are found, tax authorities may propose adjustments to the taxpayer’s tax liability, impose penalties, and initiate legal actions if necessary. The taxpayer will have the opportunity to respond, provide explanations, and appeal the findings if they disagree.

3. Penalty

Tax Audit

There are various non-compliance scenarios that can result in penalties, such as late filing or non-filing of tax returns, late payment of tax, and providing incorrect information. The penalties for omitting or understating income under Section 113(2) of the Income Tax Act, 1967 can be severe, with up to 100% of the income amount imposed as a penalty.

The latest Tax Audit Framework introduced a tiered penalty system, with penalty rates set at 15% for a first offence, 30% for a second offence, and 45% for third and subsequent offences. Taxpayers should strive to comply with tax regulations to avoid unnecessary financial burden. In certain cases, taxpayers may request a penalty waiver by providing evidence of a technical adjustment. It is important to note that this defense requires professional expertise and robust documentation. Cases of willful evasion can result in penalties of up to 300%.

Tax Investigation

The penalty for tax investigation in Malaysia depends on the severity of the offense.

Failure to provide ITRF is an offense under Section 112 of the ITA. A taxpayer who fails to provide the ITRF for one year of assessment may be fined between RM200 and RM20,000, or imprisoned for up to six months, or both (under subsection 112(1) ITA).

Making an incorrect or incomplete tax return, or providing false information regarding one’s own or another person’s tax liability, is an offense under Section 113(1) of the ITA. If found guilty, the taxpayer may be fined between RM1,000 and RM10,000, and will also have to pay a special penalty equal to twice the amount of undercharged tax.

Willful evasion is an offence under Section 114(1) of the ITA. The taxpayer guilty of the offence can be fined between RM1,000 and RM20,000, imprisoned for up to three (3) years, or both. They must also pay a special penalty of three times the amount of undercharged tax.

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