Tax FAQ
What is Tax Investigation?
Tax investigation is conducted by surprise should there be a suspicion based on precise and definite evidence that a taxpayer is deliberately trying to avoid paying tax or has committed an act of willful evasion under the tax laws. The purpose of tax investigation varies from business to business. The tax authority’s personnel will visit to the taxpayer’s business premises, personal residences, agent or representatives premises to take possession of the required documents and books of accounts for investigation purposes. Besides that, notices may be served on taxpayers, creditors and bankers of the taxpayer to collect additional information to come up with the best judgment of the tax affairs of the taxpayer.
What If Taxpayers Understated Or Omitted Their Company’s Income And Irb Finds Out?
What IRB does is to ensure the taxes reported and paid by taxpayers are correctly prepared by way of conducting tax audits. IRB’s selection process for tax audits is by way of reviewing assessment submissions for irregularities in financial ratios and among others, information provided by third party.
In cases where fraud, willful defraud or negligence is detected, IRB is empowered to revise the tax computations, taking into account tax lost beyond the 6 years of investigation even though the taxpayer may not have records for those periods. If this happens, additional assessment will be issued to recover the tax lost, coupled with penalties, which can be up to 300%. In serious cases, or for repeated offenders, the taxpayer may be prosecuted and if he is found guilty, imprisonment of up to 3 years can be imposed.
To avoid penalty, it is recommended to keep a full set of records and accounts to avoid any misunderstanding in the tax audit process.
How Does The IRB Conduct An Audit?
Once a taxpayer is selected for an audit, the IRB will inform the taxpayer via a telephone call followed by an official notification letter sent via mail or fax.
The period between the date of notification and the audit visit is 14 days. A shorter period of notification may be fixed by IRB with the consent of the taxpayer.
The scope of a tax audit under the self assessment system normally covers a period of 1 to 3 years, unless there are valid reasons to go beyond that period. The time frame for the conclusion of a tax audit is normally within 3 months.
Upon the completion of an audit, the IRB will issue a tax computation summarising the tax adjustments based on their findings and subsequently an additional assessment to collect the additional taxes from the taxpayer.
The taxpayer may still appeal against this assessment by submitting the appeal, through the prescribed Form Q to the Special Commisioners of Income Tax within 30 days from when the assessment is raised.
With effect from 1 Jan 2014, the time-bar for tax audits is reduced from 6 years to 5 years.
Penalty Provisions under Tax Audit System
(a) Penalties for omission/non-disclosure
Under the tax audit system, the IRB has also introduced a new penalty regime for non-disclosure and omission of information that affects a taxpayer’s tax liability. The penalty regime is summarised as follows:
Voluntary disclosure before selection for audit | Within 60 days from the due date for furnishing the return form | 10% |
More than 60 days but less than 6 months form the due date for furnishing the return form | 15.5% | |
6 months to 1 year | 20% | |
1 year to 3 years | 25% | |
3 years & above | 30% | |
Voluntary disclosure after the case is selected for audit but before audit commences | 35% | |
Non-disclosure (discovery during audit) | 100% of tax undercharged (may consider for 45% for 1st offence) | |
Repeated offences | +10% for each repeated offence not exceeding 100% |
(b) Penalty for not providing reasonable facilities and assistance
Based on Public Ruling 7/2000, failure by a taxpayer to provide reasonable facilities and assistance to the IRB when conducting an audit is an offence and upon conviction, the taxpayer may be liable to a fine of between RM1,000 to RM10,000 or face imprisonment for a term not exceeding 1 year or both.
(c) Failure to keep sufficient records
The company or persons responsible, upon conviction will be liable to a fine of between RM200 to RM2,000 or face imprisonment for a term not exceeding 6 months or both.
TAX AUDITS BY IRB
Under Self Assessment System, tax audits will be IRB’s key enforcement tools to ensure that the tax returns submitted are correct and have been prepared in accordance with the provisions of the laws, guidelines and rulings issued by IRB.
Essentially, an audit is an examination of a taxpayer’s records to ensure that the income and tax liability declared to the IRB in the Income Tax Return are true, correct and comply with the tax laws and rulings.
A tax audit is an examination of a taxpayer’s business records and financial affairs to ascertain that the correct amount of tax are reported and paid in accordance with the tax laws and regulations.
Desk Audit and Field Audit
IRB carries out 2 types of audits, namely Desk Audit and Field Audit.
A desk audit is done at the IRB’s office where IRB will send letters to selected taxpayers, requesting for documents to support the assessment submitted. This would normally involve checking all information on income and expenses as well as various types of claims made by a taxpayer in his income tax return. This usually concerns straightforward cases or tax adjustments which can be handled via correspondences or if necessary, an interview with the taxpayer at the IRB office.
Within 2 to 3 weeks after the audit, IRB will notify the taxpayer whether additional tax payments need to be made. If IRB’s review shows overpaid taxes, a refund will be made to the taxpayer.
A field audit is where IRB officers will audit the taxpayers’ records at their premises. It involves the examination of the taxpayer’s business records. For a sole-proprietor or partnership, it may also involve the examination of non-business records such as personal bank statements.
IRB will serve a 14 day notice to the taxpayers to prepare the necessary documents and records. There will be at least 2 officers to conduct each audit, and their names will be given in the notice.
Sometimes, IRB may conduct field audits on tax assessments up to 3 years back. Should there be discrepancy between the records and the assessment submitted, tax assessment will be amended accordingly and the taxpayer will be notified within 3 months after the audit.
The Desk Audit will involve the review of documents or information obtained by correspondence and interviews at the IRB’s offices whilst the Field Audit would entail a visit to the taxpayer’s premises for a detailed review of all revelant documents.
Cases for audit are selected through the computerised system based on risk analysis criteria and on various criteria such as business performance, financial ratios, type of industry, past compliance records, third party information, etc.
TAXPAYER RESPONSIBILITIES
Every taxpayer who is liable to tax is required to declare his income to Inland Revenue Board of Malaysia (IRBM). The taxpayer is responsible for:
- Obtaining and forwarding Income Tax Return Form (ITRF). A company has to send or return the ITRF that has been duly filled, without attached documents, to Information Processing Department, IRBM within 7 months after the close of the accounting period. Supporting documents need not be enclosed, except that in repayment cases, dividend vouchers need to be enclosed with the ITRF.
- Submitting tax estimation and paying instalment within the stipulated period
- Computing the company income tax
- Declaring income and expenses including deductions and rebates
- Keeping records for audit purposes
TAX PAYMENT – INSTALMENT PAYMENT CP204
For existing companies, the estimated tax payable has to be paid in equal monthly instalments beginning from the second month of the basis period for a year of assessment.
For new companies, installment payments must commence in the 6th month of the basis period for the year of assessment i.e. payable in the 6th month after the company commences operations. A company is required to pay the installment of the estimated tax by the 10th day of each month.
APPLICATION TO PAY BALANCE OF TAX BY INSTALLMENTS
If the company has not fully paid the tax for that period, the company can apply to pay the balance of tax by installments. The company can request in writing to the Collection Unit before the last date of payment of the relevant year. However, please note that even if the request is accepted, late payment penalty will still be imposed.
PENALTY UNDER INSTALLMENT SCHEME
- If a company fails to pay the monthly installment on the tax estimate by the stipulated date, a late payment penalty of 10% will be imposed on the balance of tax installment not paid for the month.
- If the difference between the actual tax payable and the estimated tax payable (if the revised estimate is not furnished) is more than 30 % of the actual tax payable, a 10% increase in tax will be imposed on that difference.
The formula for calculating the amount of tax to be increased is as follows:
Amount of tax to be increased = {(AT-ET) – (30% x AT)} x 10% where:
AT: actual tax payable
ET: revised estimated tax payable or estimated tax payable (if no revised estimate is furnished)
PENALTY FOR LATE PAYMENT
If the balance of tax payable is not paid by the due date, a penalty of 10% will be imposed on the outstanding amount. If the tax payable and penalty is still outstanding within 60 days from the due date, an additional penalty of 5% will be imposed on the tax and penalty outstanding.
APPEAL ON PENALTY
If the balance of tax payable is not paid by the due date, a penalty of 10% will be imposed on the outstanding amount. If the tax payable and penalty is still ouAn appeal in writing within 30 days from the statement of account can be submitted to the relevant branch (Collections Unit), if the company does not agree with the late payment penalty imposed.
The company has to pay its tax liability first irrespective of any appeal.