If you happen to be one of the “lucky” few that LHDN selects for further examination, you will want to know how to prepare and how to handle the process.
To do that, you will first need to understand the following:
What is a tax audit?
A tax audit is an examination of a tax return by the LHDN to verify that your income and deductions are accurate.
There are two types of tax audits: desk audit and field audit.
A desk audit involves simpler issues or tax adjustments that can be dealt with via correspondence at the LHDN office. It generally involves checking all information on income and expenses, as well as various types of claims made by a taxpayer in his income tax returns.
A field audit is more complicated. It typically takes place at a taxpayer’s premise and involves the examination of all the taxpayer’s business records through a tax agent or officer. If a field audit is required, you’ll receive a letter notifying you of the visit at least 14 days in advance – if LHDN requires a shorter notice, it can be arranged upon your agreement.
In the case of a sole-proprietorship or partnership, if the taxpayer’s business records are incomplete it may involve the examination of non-business records such as personal bank statements and other assets. A taxpayer will be given notice prior to a field audit.
The time required to complete an on-site examination could span between one and three days. However, the audit timeframe may be extended depending on the size of the business and complexity of business transactions.
Both types of audits are aimed at encouraging voluntary compliance with the tax laws and regulations, and to ensure that a higher tax compliance rate is achieved under the Self-Assessment System.
Why was I selected for an audit?
The basis of audit case selections includes the following:
- Through the computer system based on risk analysis criteria
- Information received from a third party or parties
- Based on specific category of industries
- Based on specific issues affecting a certain group of taxpayers or based on specific issues surrounding a geographic location.
What should I do?
The first thing to do would be to keep calm and let the auditor do their job. Depending on the reason and rationale for the audit, the taxpayer will be required to provide relevant information pertaining to the issue at hand.
If there are tax adjustments to be made, the taxpayer will receive a notification with details of proposed tax adjustments and the rationale for making such adjustments.
The taxpayer will be allowed to state their views on the findings or proposed tax adjustments. If they want to file an appeal, they’ll need to do so within 30 days of the notification to the Special Commissioners of Income Tax. Additional information and copies of evidence should be provided to support this objection.
This is why we should always keep our records like receipts and invoices for seven years, as LHDN has the right to audit your tax file from as far back as seven years.
In an audit, a taxpayer can request for his or her tax agent to be present during an interview. A taxpayer who is not conversant in Bahasa Malaysia or English is allowed to bring in an interpreter.
If a taxpayer appoints a new tax agent to handle his or her audit case, he or she will need to submit a copy of the letter of appointment.
What shouldn’t I do?
First things first, do not obstruct or hinder the audit officer from performing his duties. Failure to cooperate with an audit officer is an offence.
Obstructions include refusing an audit officer from entering lands, buildings, places and premises to perform his duties.
Refusal or purposely delaying the provision of relevant books of accounts or other documents that are required by the audit officer, or failure to provide reasonable responses to questions raised or assistance to the officer in carrying out his duties could also land you in hot soup.
Taxpayers are also prohibited from giving any form of gifts and transacting any business with the audit officer during the auditing process.
If you can prove that your initial return was complete and accurate, you will not be questioned further. But if they find errors or purposeful misreporting in your filings, you will either be fined with a penalty or imprisonment, or both, depending on the severity or the number of offences:
| Offence | Fine |
|---|---|
| Failure to furnish an Income Tax Return Form | RM200 to RM20,000 or imprisonment (not exceeding six months) or both |
| Failure to give notice of changeability to tax | RM200 to RM20,000 or imprisonment (not exceeding six months) or both |
| Make an incorrect tax return by omitting or understating any income | RM1,000 to RM10,000 and 200% of tax undercharged |
| Give any incorrect information in matters affecting the tax liability of a taxpayer or any other person | RM1,000 to RM10,000 and 200% of tax undercharged |
| Willfully and intentionally evade or assist any other person to evade tax | RM1,000 to RM20,000 or imprisonment (not exceeding three years) or both and 300% of tax undercharged |
| Assist or advise others to under declare their income | RM2,000 to RM20,000 or imprisonment (not exceeding three years) or both |
| Attempting to leave the country without payment of tax | RM200 to RM20,000 or imprisonment (not exceeding six months) or both |
| Obstructing any authorised officer of IRBM in carrying out his duties | RM1,000 to RM10,000 or imprisonment (not exceeding one year) or both |
| Failure to comply with an order to keep proper records and documentation | RM300 to RM10,000 or imprisonment (not exceeding one year) or both |
| Failure to comply with a notice asking for certain information as required by IRBM | RM200 to RM20,000 or imprisonment or (not exceeding six months) both |
| Failure to give notice on changes of address within three months | RM200 to RM20,000 or imprisonment (not exceeding six months) or both |
To avoid trouble, taxpayers are required to keep all sources of records, documents and working sheets for seven years (calculated starting from the end of the year in which the Income Tax Return Form is filed) as evidence and reference if required by an audit.
You can run but you can’t hide
We often hear stories of people who’d successfully evaded taxes for years, but it is only a matter of time before the authorities catch up and force these evaders to face the music.
To avoid financial and legal implications, it is important for all taxpayers to ensure their taxes are paid on time and accurately. Nobody enjoys filing for taxes, but a little planning can make the process a whole lot less “taxing”.
