The Inland Revenue Board (IRB) will carry out an investigation on a taxpayer if they suspect that there is tax evasion commited by a taxpayer. Tax evasion can be carried oout in various forms including the omission of income, understatement of sales, fictitious purchases and expenses and valuation of stocks.
What is Tax Investigation?
Tax investigation is basically an examination of a taxpayer's business and/or individual's books, records and documents to ensure that the tax paid. There are 2 categories of tax investigation:
1. Civil tax investigation
This involves detection of evasion with the primary concern of recovery of tax loss and imposition of heavy penalties; and
2. Criminal tax investigation
This is similar to civil tax investigation except that the focus is on gathering of admissible evidence with a view towards prosecution and conviction of the tax evader.
What trigger off a tax investigation?
An investigation is prompted by a suspicious that a taxpayer has committed tax evasion or non-compliance. Some of the factors which may trigger off and investigation include the following:
a. Unreasonably low gross profit margin when compared with the industry average;
b. Persistent failure to submit tax returns;
c. Failure to keep proper business records (reported by the tax field auditors);
d. Acquisition of private assets of significant amounts whereby the sources of funds are not known.
e. Informers (business rivals, disgruntled employees, lovers); and
f. Mass media (e.g : stories featuring people with new wealth).
How is tax investigation conducted?
The process of tax investigation will involve the following:
a. A surprise visit to the business premises and personal residences simultaneously;
b. A thorough search of all the places visited;
c. Seizure of books, records and documents relevant to the investigation;
d. Access, download and take possession of the relevant information from all electronic storage media;
e. Interview and take statements from the taxpayer and other relevant persons during the inspection visits;
f. The investigation officers will examine the taxpayer's books and records to identify fictitious or suspicious accounting entries in order to ascertain the amount of taxable income evaded;
g. Numerous interviews and meetings will be held at the IRB's premises to discuss the submissions made by the taxpayer/tax agent and the IRB's findings;
h. Upon final agreement between the IRB and the tax payer, a composite assessment will be issued. Penalties starting from 45% will be imposed on the amount of tax under declared.
What is the impact on taxpayers?
a. Most taxpayers found tax investigations to be traumatic experience;
b. Taxes may have to be pad upfront and this can be detrimental to the taxpayer's cash-flow;
c. Unproductive use of time as a lot of resources will have to be channelled towards this investigations; and
d. Disruption and possible adverse effect on the taxpayer's business.
How to deal with tax investigation?
a. Do not make any unnecessary comments or give wrong statements;
b. Do not argue with the investigation officers or view them with hostility. Be cooperative at all times;
c. Do not make a claim unless it is reasonable and can be substantiated;
d. Get in touch with competent tax agent and confide in him totally. All important information should be revealed to the tax agent so he has as complete picture as possible.
Conclusion
A tax investigation is usually a very traumatic and time consuming affair. A taxpayer can insult himself if he is well represented by an experienced and competent tax agent who can assist him in minimizing his tax exposure and penalties.
Knowing what is involved in a tax investigation, all taxpayers will want to avoid it. It is important therefore that taxpayers conduct their affairs in such a manner that they do not arouse the suspicious of the IRB.
-- Articles from SME & ENTREPRENEURSHIP MALAYSIA magazine --
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