LATELY, there has been increased activity in the areas of tax audits and investigations. The key difference between a tax audit and an investigation is the element of surprise in the case of tax investigation, while a tax audit is made known beforehand to the taxpayer concerned.

Both have the same objective of identifying whether the taxpayer has been complying with the tax laws and legislations and identifying any shortfall in taxes to be collected. In most cases, whenever there are tax adjustments, penalties ranging from 15% up to 100% will be triggered, unless the adjustment is being made on a technical matter where the legal position is a grey area.

When self-assessment came into the picture in the early 2000s, the message sent out by the Inland Revenue Board (IRB) was that the audits were being conducted to educate taxpayers to help them comply with the laws and rules. However, the focus on education has somewhat receded over the past two decades and now it appears the motive of tax audits is slanted towards tax collection. It would be to the benefit of the country if there is a greater shift back towards education rather than enforcement and collection of taxes and penalties. Penalties should only be imposed when there is real culpability by the taxpayer.

Dealing with audits

The IRB has sufficient powers to carry out audit and unannounced investigation visits to collect documents, question the taxpayers, take statements, copy files from your hard drives, servers and cloud. They do not need a warrant from the court.

Investigations are a little “frightening” because a whole group of officers which perhaps may be more than 10 officers could descend upon your offices without any prior notice and start collecting information from your premises and interviewing officials from the company.

However, in an audit, you are informed well in advance of their visit.

Thereafter the process is the same because both involve questioning the taxpayers and collecting documents. At this stage, it is best to cooperate with the IRB officials and provide them with as much information as they require. However, if you are not sure of the facts and you are not able to answer the question, it is best to inform the IRB officials that you will revert to them with the answers after checking your facts.

Generally, the taxpayers are not technical people and, therefore, if there are any issues that involve technical matters, it would be best to immediately call your tax agent to be present at the audit or investigation to answer those questions or guide you in answering such questions.

The smaller tax audits are usually conducted at the IRB’s offices and is referred to as a desk audit. The larger audits usually involve a field visit to the taxpayer’s offices. We understand that the IRB is desirous in increasing the field audits so that they can get a better understanding of the taxpayer’s business.

Once the visits are over and the tax officials come up with their findings, it is time for the taxpayer and his advisers to either accept the findings, or rebut the findings supported by facts, evidence and law. It is extremely important that the taxpayer communicates his actual conduct of the business because if there is a misunderstanding by the IRB officials, the application of the law by the IRB officials could also be incorrect.

Finally, the taxpayer and the IRB officials can come to an amicable settlement on the various issues. In the event you are unable to agree with the IRB and the IRB issues a notice of additional assessment, you should within 30 days file an appeal to the Special Commissioners. However, the taxpayer must pay the tax within a 30-day period while the matter is under appeal.

Normally, audits and investigations can be settled provided the taxpayer and the IRB officials have a good working relationship and are willing to listen to one another’s explanations. The whole process should not be confrontational but should be reconciliatory.

This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (