5 Things You Should Know About Tax Audit
In Malaysia, a tax audit is an examination of a taxpayer’s financial records and tax returns by the Inland Revenue Board of Malaysia (IRBM) to ensure compliance with tax laws and regulations. The main objective of a tax audit is to verify the accuracy and completeness of the taxpayer’s income, deductions, credits, and tax liabilities.
The IRBM conducts tax audits on a regular basis to ensure that taxpayers are complying with their tax obligations. Tax audits may be conducted randomly or based on specific criteria, such as a high-risk taxpayer, a taxpayer with a history of non-compliance, or a taxpayer with an unusual transaction.
- Type of tax audit
- General Review (f.k.a. Desk Audit):
The IRBM conducts General Review at their office. This type of audit typically deals with issues or adjustments to income and taxes that can be resolved through correspondence. However, if additional information is needed, the taxpayer may be called in for an interview at the IRBM’s office.
A General Review generally involves a review and examination of all income and expenditure information, as well as any claims made by the taxpayer in their income tax return form (ITRF).
In some cases, a desk audit may lead to a field audit action. When this happens, the taxpayer will receive a field audit notification letter as part of the normal process of commencing the field audit.
- Comprehensive Review (k.a. Field Audit):
During a Comprehensive Review, the IRBM reviews a taxpayer’s business records either at their premises, at the IRBM’s office, or at an agreed-upon location. This type of audit involves a comprehensive audit of the taxpayer’s financial records.
In situations where the taxpayer is a sole proprietor or in a partnership business, and their business records are incomplete, the review may include an examination of the taxpayer’s non-business records, such as personal bank statements, to gain a better understanding of their financial affairs.
- Years of assessment covered
Generally, tax audits will be carried out for a period ranging from three (3) to five (5) years of assessment.
However, the limit for this coverage period does not apply to cases involving fraud, wilful default, or negligence as provided under subsection 91(3) of the ITA.
- Selection of Cases
The selection of tax audit cases is conducted through computerised systems based on risk assessment criteria and/or based on various sources of information received.
The criteria used in tax audit case selection are as follows:
- risk assessment;
- information received from third party;
- specific industries;
- specific issues for a certain group of taxpayers; and
- location
- What is the penalty rate like?
In the event of an understatement or commission of any income as a result of the audit findings, the penalty may be imposed under subsection 113(2) of the ITA equivalent to the undercharged tax amount (100%).
However, for the purposes of this Tax Audit Framework 2022, the penalties imposed under subsection 113(2) of the ITA are as follows:
| Offences (Audit) | Penalty Rate |
| First offence | 15% |
| Second offence | 30% |
| Third and subsequent offence | 45% |
There is no penalty under section 113(2) will be imposed on technical adjustment.
“Technical Adjustment” refers to different interpretations of the tax legislation based on facts & issues for each case.
Please note that Technical Adjustment does not apply to cases in which the IRBM has issued Public Rulings, Guidelines, Practice Notes, Income Tax Regulations, Income Tax (Exemption) Orders, or Income Tax Rules.
IRBM emphasizes that should there be any tax fraud whereby the taxpayer has declared incorrect tax return deliberately, the penalty will be imposed at the rate of 100% under subsection 113(2) of the ITA.
- Any penalty for voluntarily disclosing my past mistakes?
If the taxpayer voluntarily discloses by submitting an amended tax return form within 6 months from the due date for submission of ITRF, the penalty will be imposed at 10%.
For cases beyond 6 months and before the tax audit commences, the penalty to be imposed under subsection 113(2) is 15%.
Overall, a tax audit is an important tool for the Malaysian government to ensure that taxpayers are fulfilling their tax obligations and contributing to the country’s development. There is no need to panic when you are selected for audit. It does not imply that you have committed an offence.
Talk to us, if you want to right the wrong before IRBM knocks at your doorstep. We are more than happy to assist.
