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WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION

WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION. Importance of Distinguishing Between Tax Audit & Tax Investigation. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION.

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WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION

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  1. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION

  2. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION Importance of Distinguishing Between Tax Audit & Tax Investigation

  3. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION Importance of Distinguishing Between Tax Audit & Tax Investigation

  4. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION What Is A Tax Audit • Desk Audit • 80 % Tax files are audited yearly • Audit Work is done in IRB office base on declaration by Taxpayer • Field Audit • 20% of files are audited yearly • Audit work is done at Taxpayer’s premises • Examination of documents determined and requested beforehand

  5. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION What Triggers A Tax Audit (Field Audit) • Some of the Indicators that may trigger IRBM’s attention to commence a Tax Field Audit • Non conforming Accounting Ratios • Inconsistent Accounting Practices • Weakness in Final Accounts submitted to IRBM • Frequent change of accounting personnel • Late submission of Tax Returns

  6. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION Preparation For A Tax Audit • Have a clear understanding of what is a Tax Audit • Assess and determine the accuracy of your declared Income • Ensure that your tax declared sufficiently reflect your actual earnings and there are no outstanding tax liabilities • Ascertain that all your accounting books and records are complete and up to date • Ensure all the supporting documents are up to date and available for inspection

  7. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION ATTENDING A TAX AUDIT • Welcoming the Tax Audit team; • Have all the requested books and documents ready for inspection; • Have the person who prepared the accounts present to provide answers for any accounting queries; • Have your Tax Consultant or Accountant present to assist you; • Prepare to give explanation pertaining to the modus operandi of your business; • Prepare to give explanations to any preliminary findings at the tax audit exit conference.

  8. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION Post Tax Audit – Management of Tax Liability If Any • Plan & manage your tax liability with your Tax Consultant • Attending a Tax Interview and knowing what to say • Negotiating for a Tax Settlement

  9. Desk Audit What is a desk audit? How does it come about? • Desk audit is an audit process conducted in the office of an IRBM branch. The audit is base on the income and other declarations made by a taxpayer; • Desk Audit Officers will look at your income declaration and make comparison with previous years’ declarations; • The types of income that had been declared each year; • Analysis of the types of reliefs that are being claimed. The frequency and the amount of reliefs claimed will be made; • In this process, Taxpayer will be informed by letter to provide proofs of expenses for the various reliefs that had been claimed. Failure to provide documents or acceptable documents will result in the claims being disallowed and subjected to tax with a penalty under Sec.113(2) of ITA 67

  10. Field Audit What is a field audit? How does it come about? • Annually 20% of Tax files will be selected for field audit; • Cases are normally selected by way of analysis by Desk Audit Officer; • Cases can also be selected base on informers’ information, industry or trade base; • Cases can also be identified by IRBM activities such as PCB Audit, Street Surveys, and Economic Profiling.

  11. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION What Triggers A Tax Audit • Some of the Indicators that may trigger IRBM’s attention to commence a Tax Audit • Non conforming Accounting Ratios • Inconsistent Accounting Practices • Weakness in Final Accounts submitted to IRBM • Frequent change of accounting personnel • Late submission of Tax Returns

  12. What Triggers A Tax Audit Non Conforming Accounting Ratios • Net Profit & Gross Profit ratios variance with standard ratio is too big; • Net Profit & Gross Profit ratios do not match with the type of business; • Debtors/day ratio mismatch with Creditors/day ratio; • Stock turnover ratio comparison with Gross Profit ratio

  13. What Triggers A Tax Audit Inconsistent Accounting Practices • Frequent switching between cash basis to accrual basis and vice versa in accounts declaration; • Recognition of income and expenses – especially year end adjustments; • Treatment of trade debtors & creditors; other debtors & creditors; • Comparison of cash and bank balances between the years; • Comparison of directors’ account and drawings account between the years

  14. What Triggers A Tax Audit What Triggers A Tax Audit • Weakness in Final Accounts submitted to IRBM • Accounts without balance sheet; • Accounts with unusual high closing balance of directors’ account; • Accounts with very high closing balance of drawings; • Accounts with high variance of trading activities; • Accounts submitted with ‘Qualified Auditor’s Report’; • Accounts submitted without Tax Computation

  15. What Triggers A Tax Audit • Frequent change of accounting personnel • Frequent change of accountant or tax agent is a clear indication of possibility of tax liability manipulation; • Frequent changes of accounting staff is also negatively interpreted; • Loose management and control of the financial affairs of the business is also a point of interest to IRB;

  16. What Triggers A Tax Audit • Late submission of Tax Returns • Habitual late submission of Tax Returns will attract the attention of IRB. This is always interpreted as attempts to manipulate the accounts to evade tax liability.

  17. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION Preparation For A Tax Audit • Have a clear understanding of what is a Tax Audit • Assess and determine the accuracy of your declared Income • Ensure that your tax declared sufficiently reflect your actual earnings and there are no outstanding tax liabilities • Ascertain that all your accounting books and records are complete and up to date • Ensure all the supporting documents are up to date and available for inspection

  18. Preparation For A Tax Audit Have a clear understanding of what is a Tax Audit • Understand that when you receive a letter from IRB informing you of a Tax Audit visit, it means that you will be facing a Tax Field Audit; • A Tax Audit is carried out in your office premises by examining your account books, records and documents; • A Tax Audit is carried out to ensure tax compliance as differentiated from a Tax Investigation which is to determine tax evasion;

  19. Preparation For A Tax Audit Assess and determine the accuracy of your declared Income • Before you face a Tax Audit, it is prudent that you sit down with your accountant and assess and determine the accuracy of your income declared for the years it is being audited; • Identify the areas where weakness can be found in your book keeping and records maintenance as well as business control and management; • If there had been instances where inaccuracy had occurred, make a decision whether to make a voluntary declaration before they initiate the audit

  20. Preparation For A Tax Audit Ensure that your tax declared sufficiently reflect your actual earnings and there are no outstanding tax liabilities • It is very important that your tax liability with the IRB had been cleared each year. As a Tax Audit is to ensure compliance, any outstanding tax due and not paid will be deem as non-compliance; • Ensuring that the income declared reflects a true and accurate declaration of your annual income is very important. The Tax Audit team would most probably have researched your lifestyle and your assets and liabilities, therefore any flaw in your income declaration will probably invite a more detail examination of your accounts and tax declaration.

  21. Preparation For A Tax Audit Ascertain that all your accounting books and records are complete and up to date • Ensure all the accounting books, records and documents are complete and sorted out into different financial years; • If the accounts are computerized, records and documents are make available soft copies and hard copies of all the ledgers and final accounts are updated; • It is of utmost importance that all the accounting records and documents are available for inspection. Failure to produce these documents may result that your claim for the expense be denied or the accounts submitted be rejected under Sec. 140 of ACP 67 and the DGIR invokes Sec. 90 of the same act to raise a best judgment assessment on you.

  22. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION ATTENDING A TAX AUDIT • Welcoming the Tax Audit team; • Have all the requested books and documents ready for inspection; • Have the person who prepared the accounts present to provide answers for any accounting queries; • Have your Tax Consultant or Accountant present to assist you; • Prepare to give explanation pertaining to the modus operandi of your business; • Prepare to give explanations to any preliminary findings at the tax audit conference.

  23. ATTENDING A TAX AUDIT • Welcoming the Tax Audit team • As Taxpayer had been informed in advance of the arrival of the Tax Audit Team, Taxpayer should be present together with his accountant, accounts staff and his Tax Agent if possible; • Make available a room with tables and chairs for the team to perform their duties. It is preferable that the room be away from the view of public; • There is no necessity to provide food or drinks for the Audit team, a few bottles of drinking water should suffice;

  24. ATTENDING A TAX AUDIT Have all the requested books and documents ready for inspection • Normally the books and documents that are requested are account books, ledgers, journals, sales & purchases invoices, bills, payment vouchers, bank statements, check butts, bank-in slips etc; • Arrange the books and documents in yearly bundles. This will help to ease the audit process and therefore shorten the time spent in your premises and eventually lead to an earlier closure of the audit case; • This will also be viewed as a very positive co-operation with IRB and will be favorable when negotiating for a settlement.

  25. ATTENDING A TAX AUDIT Have your accounting staff present to help in giving explanation to any queries raised • Have your account clerks present to explain how are the accounting entries are recorded; • Have your Accountant or Tax Agent present to help to explain how the final accounts are prepared and how are your tax liabilities are computed;

  26. ATTENDING A TAX AUDIT Preparation to give explanation on Modus Operandi of business and preliminary findings of Tax Audit • As the owner of the business, you should be prepared to give details on the management and control of the business; • You should be ready to explain the way you run the business, like how you overcome business competition, determine your pricing, securing your source of supplier etc; • How do you control your banking, financial management etc; • Before the conclusion of an audit visit, normally the audit team will be able to produce a preliminary findings and queries that may need further explanation and verification. Be prepared to field these queries

  27. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION Post Tax Audit – Management of Tax Liability If Any • Plan & manage your tax liability with your Tax Consultant • Attending a Tax Interview and knowing what to say • Negotiating for a Tax Settlement

  28. Post Tax Audit – Management of Tax Liability If Any • Plan & manage your tax liability with your Tax Consultant • The main aim of a Tax Audit is to encourage voluntary tax compliance. However in most cases there are tax inadequacies detected in an audit, which will attract additional tax and penalty, In such instances, it is important to discuss with your Tax Agent how to manage it; • Draw up contingency plans to cope with the sudden increase in tax payment as it may put pressure on your cash flow

  29. Post Tax Audit – Management of Tax Liability If Any • Attending a Tax Interview and knowing what to say • After a visit from the Tax Audit team, it is normal for a series of meetings to be called by IRB to seek further details or discussion on settlement; • It is important to know what to say during such meetings or interview. Most of the time Taxpayer tend to talk too much and disclose information that could jeopardize their case. • It is important to speak on the issues that had been raised. Restrain from bringing up new issues or new information that can create suspicions or doubts in the mind of IRB officers.

  30. Post Tax Audit – Management of Tax Liability If Any • Negotiating for a Tax Settlement • Negotiating for a tax settlement needs to be properly planned and strategized; • There need to be a detail study of your financial standing and cash flow; • There need to be a clear consideration, whether it is advantages to pay the additional tax liabilities over a longer period with interest loaded or a shorter period with savings in interest;

  31. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION Offences Under The Income Tax Act 1967 • It is important to know what action or inaction that can be constituted as an offence under the Income Tax Act 1967 • Failure to notify chargeability; • Late in submission of a tax return; • Failure to provide information as required by IRB; • Failure to keep records and give receipts; • Failure to submit a return as an employer; • Failure to make tax deduction as per Scheduler Tax Deduction and remit to IRB; • Failure to notify any change of address; • Making an incorrect or inadequate return; • Leaving Malaysia without payment of tax’ • Obstruction of an IRB officer from performing his duties;

  32. Failure to notify chargeability & Late in submission of a tax return • Sec. 77(1) requires: • (1) a person other than a company, trust body or co-operative need to file in his/her tax return before 30th June for those carrying on a business. In other cases before 30th April each year; • (2) a person who has a chargeable income for that year or if he has no chargeable income for that year but had submitted a tax return or a chargeable income in the immediate preceding year to file a tax return in a prescribe form within the dates stated above; • (3) An individual who first arrive in Malaysia, to notify his chargeability within 2 months from his date of arrival. • Sec. 77A(1) A company must submit a tax return within 7 months of the date of its close of financial period.

  33. Failure to notify chargeability & Late in submission of a tax return • Offences under Sec. 77(1) or Sec. 77A(1) is punishable under Sec. 112 as follows: • If prosecuted in court under Sec. 112(1), and found guilty will be liable to a fine of not less than RM200, and not more than RM2000 or an imprisonment of not more than 6 months or both; • If not prosecution is instituted under Sec. 112(3), the Director General may require that person to pay a penalty equal to 3X the tax payable before any set-off, repayment or relief.

  34. Failure To Provide Information • Sec. 78 – Power to call for returns, attend personally to produce books of accounts, returns, documents etc for examination; • Sec. 79 – Power to call for bank statements of bank accounts or loan operated jointly or separately by taxpayer, spouse, children and others; • Sec. 80 - Power to access any buildings etc. to inspect and seize any books, documents, articles that can determine his tax liability; • Sec. 81 – Power to require any person, orally or in writing to provide information to determine his or others tax liability. • The following provisions of the Income Tax Act 67 provides the Director General of IRBM the power to access buildings and seize documents, call for returns and information:

  35. Failure To Provide Information Where taxpayer fail to comply with any request under the above provisions, he or she is deem to have committed an offence and punishable under Sec. 120 of the Income Tax Act. Sec. 120 provides that any person guilty of an offence under this section shall be liable to a fine of not less than RM200, and not more than RM2000 or to an imprisonment of not more than 6 months or both.

  36. Failure To Keep Records And Give Receipts • Sec. 82(1)(a) requires a person to keep all records of his business for 7 years from the end of the year for which the income relates; • Sec. 82(1)(b) requires a person to issue printed receipts serially numbered when his gross annual receipts: • From sale of goods exceed RM150,000.00 • From services rendered exceed RM100,000.00 • Offences under Sec. 82 of the Income Tax Act is punishable under Sec. 119A which carries a fine of not less than RM300 but not more than RM10,000 or 1 year imprisonment or both.

  37. Failure to submit a return as an employer • Sec. 83 of the ITA 67 requires the employer to perform the following duties: • (1) Make a return in a prescribed form before 31st March each year; • (1A) Prepare and provide his employee an annual statement of his remuneration on or before the last day of February of the immediate following year; • (2) Where he commence to employ an employee, to inform the IRB of such employment within 1 month of the commencement of such employment; • (3) Where he is about to cease an employment of an employee, shall inform IRB of such cessation within 1 month before such cessation;

  38. Failure to submit a return as an employer continued • (4) Where he has knowledge that an employee is about to leave Malaysia for a period of not less than 3 months, notify the IRB of such departure not less than 1 month from the date of such intending departure; • (5) Where he has in his possession retain any sum of money of an employee who is about to leave or has left Malaysia, he shall retain such money until he has written notification to either remit all or part of such money to IRB, or to release the money to the employee.

  39. Failure to submit a return as an employer Where taxpayer fail to comply with any request under the above provisions, he or she is deem to have committed an offence and punishable under Sec. 120 of the Income Tax Act. Sec. 120 provides that any person guilty of an offence under this section shall be liable to a fine of not less than RM200, and not more than RM2000 or to an imprisonment of not more than 6 months or both.

  40. Failure to make tax deduction as per Scheduler Tax Deduction (PCB) and remit to IRB Income Tax (Deduction from Remuneration) Rules 1994 • Under the above-mentioned rules, the employer is responsible to: • Deduct the MTD from the remuneration of employee in each month or the relevant • month in accordance with the Schedule of Monthly Tax Deductions or • Computerised Calculation Method and pay to the Director General. • Make additional deductions from employee's remuneration in accordance with the • direction given by the Director General under Rule 4 of MTD Rules. • Employer shall pay to the Director General, not later than the tenth day of every • calendar month, the total amount of tax deducted or should have been deducted • by him from the remuneration of employees during the preceding calendar month. • Furnish a complete and accurate employee’s information of the following in a • return when submitting MTD payments/additional deductions:

  41. Failure to make tax deduction as per Scheduler Tax Deduction (PCB) and remit to IRB Income Tax (Deduction from Remuneration) Rules 1994 • Failure to comply with Monthly Tax Deduction will render an employer liable to prosecution under Rule 17, Income Tax (Deduction from Remuneration) Rules 1994; • Types of offences under "The Rules" are : • Failure to remit monthly tax deduction of employees by the 10th. of the following month. • Failure to deduct and / or under deduct monthly tax deduction of employees. • Failure to remit or under remit MTD or CP38 deduction that has been made from employees' remuneration. • Failure to give complete and accurate information about employees. • An Employer who is guilty of an offence under these rules, is liable to prosecution and upon conviction, can be fined up not less than RM200 and not more than RM2,000 or to imprisonment for a term not exceeding six months or to both.

  42. Failure to notify any change of address Sec. 89 of ITA 67 stipulates that any person who changes his address shall within 3 months of such change of address notify the Director General of IRB in writing of such change. Where taxpayer fail to comply with any request under the above provisions, he or she is deem to have committed an offence and punishable under Sec. 120 of the Income Tax Act. Sec. 120 provides that any person guilty of an offence under this section shall be liable to a fine of not less than RM200, and not more than RM2000 or to an imprisonment of not more than 6 months or both.

  43. Making an incorrect or inadequate return • Any person who makes an incorrect or inadequate return shall be guilty of an offence under Sec. 113 as follow: • Sec. 113(1) charged in court, unless proven it is done in good faith, shall be liable to a fine of not less than RM1000 and not more than RM10,000 and shall pay a special penalty of double the amount of • tax which has been undercharged; • Sec.113(2) Where no prosecution is instituted, be liable to pay a penalty equal to the amount of tax which has been undercharged; • Sec.124(3) The Director General may remit or rebate the amount of penalty payable.

  44. Willfully Making an Incorrect or Inadequate Return • Sec. 114(1) states that a person who willfully and with intent to evade or assist other to evade tax if he does the following acts: • Omit to report an income in his return; • Make a false statement or entry in his return; • Gives a wrong or false answer, orally or written, to question or request for information; • Prepares, maintains or authorizes the preparation false books of accounts or records; • Falsifies or authorizes the falsification of books of account or records; • Makes use or authorizes the use of fraud, art or contrivance in the evasion of tax

  45. Willfully Making an Incorrect or Inadequate Return continued Shall be guilty of an offence and upon conviction will be liable to fine of not less than RM1,000 and not more than RM20,000 or imprisonment of not more than 3 years or both and pay a special penalty of 3X the tax undercharged. Sec.114(1A) Any person who assists in or advise the preparation of return resulting in the understatement of tax, unless he can prove that it was given with due care, shall be guilty of an offence and be liable to a fine of not less than RM2,000 and not more than RM20,000 or imprisonment of not more than 3 years or both. Sec.114(2) Where it is proved that a person had made or assist to make a false statement or false entry in his account books or documents, shall be deem to have made such act with intent to evade tax unless it can be proved otherwise.

  46. Leaving Malaysia Without Payment Of Tax Sec. 115(1) Any person who knowing that a certificate restricting him to leave Malaysia, voluntarily or attempts to leave Malaysia without full payment or make arrangement to furnish security for the payment of his tax, sums and debts stated in the certificate, shall be guilty of an offence and be liable to a fine of not less than RM200 and not more than RM2,000 or imprisonment of not more than 6 months or both. Sec. 115(2) A Police Officer or Immigration Officer may arrest any person without warrant if he reasonably suspect that that person had committed an offence under this act.

  47. Obstruction Of An IRB Officer From Performing His Duties • Sec. 116 states a person is said to have obstructed an IRB Officer from performing his duties if he: • Obstruct or do not permit an authorized officer from entering any land, building or place; • Obstruct an authorized officer from exercising his function under ITA 67; • Refuse to produce books or documents under his custody or control when requested by an authorized officer; • Fails to provide reasonable facilities or assistance to an authorized officer in exercising his powers under ITA 67; • Refuse to answer any question relating to any purposes lawfully ask of him by an authorized officer. • Shall be guilty of an offence upon conviction and be liable to a fine not less than RM1,000 and not more than RM10,000 or to imprisonment of not more than 1 year or both.

  48. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION • After having a brief discussion on my presentation, I hope that you have a better understanding on what is a Tax Audit compared with a Tax Investigation; • It is also my hope that you will be in a more positive position when you receive a letter of intent for a Tax Audit; • It is also my achievement if you can face and handle a Tax Audit negotiation with confidence until its successful conclusion

  49. WHAT YOU SHOULD KNOW ABOUT A TAX AUDIT OR TAX INVESTIGATION THANKYOU

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