Taxation is an essential part of the Malaysian economy, and the Inland Revenue Board of Malaysia (IRBM) plays a critical role in ensuring compliance with tax laws and regulations. As part of this responsibility, IRBM carries out tax audits to verify that taxpayers are reporting the correct amount of income and paying the right amount of taxes. In this article, we will discuss the legal provisions, definitions, and procedures related to tax audits in Malaysia.
A tax audit is an examination of a taxpayer’s business accounts and financial affairs to ensure that the correct amount of income has been reported and taxes paid in compliance with tax laws and regulations. IRBM carries out two types of audits: desk audits and field audits:
ii) Audit Visit
iii) Duration of Field Audit Visit
iv) Record Review / Examination
v) Audit Settlement
– Taxpayers may be called or present to the IRBM’s office to discuss audit findings issues or seek clarification on the progress of the audit process or provide further information to expedite the settlement of the audit.
– The taxpayer shall be notified in writing through the “Case Review Findings Letter” covering the following matters:
– The taxpayer will be given the chance to provide feedback and clarification regarding the audit findings.
– If the taxpayer is dissatisfied with the audit findings which are issued, the taxpayer may make an objection within 18 days from the date of the “Case Review Findings Letter” by submitting additional information and supporting evidence to support his objection.
– The taxpayer’s objections will be reviewed and the taxpayer will be informed accordingly of the final audit findings.
– If no objection is received within 18 days from the date of the “Case Review Findings Letter”, the taxpayer is deemed to have agreed to the audit findings.
– Amount of income, tax, and penalty adjustments (if any) and the years of assessment involved shall be notified by the “Case Settlement Letter”. Subsequently, a Notice of Assessment or Notification of Non-chargeability will be issued.
– If no adjustment is made, a letter notifying of an audit settlement without adjustment will be issued
– Under certain desk audit cases, a “Case Review Finding Letter” will not be issued to the taxpayer. But the taxpayer will be notified of income and tax adjustments with the notice of assessment.
– The audit case must be completed within 90 days from the commencement of the audit visit date or the date of the “Determination of Commencement of Case Settlement Period Letter”. If the case cannot be resolved within 90 days, the taxpayer will be notified by the IRBM.
– Completed audit cases will not be re-audited for the same year of assessment and issue. However, in the event of other issues or new information is received for the respective year of assessment, a re-audit may be carried out.
What is the penalty for tax audit findings?
Under the ITA, taxpayers can face penalties if the audit findings reveal any understatement or omission of income. The penalty is imposed under subsection 113(2) of the ITA and is equivalent to the undercharged tax amount (100%). For the purposes of the Tax Audit Framework, the penalty is imposed at a rate of 45% of the tax undercharged. However, the Director General of Inland Revenue (DGIR) has the discretion to reduce or eliminate penalties under subsection 124(3) of the ITA.
In cases where the taxpayer commits a repeated offense after being audited or investigated, the penalty rate can be increased to 100% of the tax undercharged under subsection 113(2) of the ITA.
There are also concession penalty rates for taxpayers who voluntarily make a disclosure. Taxpayers are only eligible for these concession rates if they make a voluntary disclosure before the audit has begun. The penalty rates for voluntary disclosure cases under subsection 113(2) of the ITA are as follows:
|39(1A)||Deduction is not allowed if information required by the Director General of Inland Revenue (DGIR) through a notice under section 81 of the ITA is not provided within the time specified|
|78||Power to call for specific returns and production of books|
|79||Power to call for statements of bank accounts etc|
|80||Power of access to buildings and documents etc|
|81||Power to call for information|
|82||Duty to keep records and give receipts|
|82A||Duty to keep documents for ascertaining of chargeable income and tax payable|
|97A(2) & 99||Right of appeal (shall not apply to a deemed assessment under s.90(1) and s.91A)|
|100||Extension of time for appeal|
|101||Review by Director General|
|102||Disposal of appeals (withdraw appeal)|
|112||Failure to furnish Income Tax Return Form (ITRF)|
|116||Obstruction of Officers|
|119A||Failure to keep records|
|138||Certain materials are to be treated as confidential|
|140||Power to disregard certain transactions|
|141||Power regarding certain transactions by non-residents|
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