The Inland Revenue Board of Malaysia (IRB) conducts tax audits to ensure that taxpayers have declared the right amount of income in their income tax returns in accordance with current tax laws and regulations.
There are two types of tax audits that can be carried out by the IRB, namely, desk audits and field audits. Desk audits are conducted on the supporting documents requested by the IRB from selected taxpayers in relation to the taxpayers’ business transactions and income tax paid. As the name suggests, field audits are usually carried out at the taxpayers’ premises. However, during the Covid-19 pandemic, the IRB officers have been mainly conducting desk audits to comply with the standard procedures enforced by the Malaysian government.
The period of review for the tax audit ranges from three to five years of assessment. Cases selected for tax audits are mainly based on risk assessment, third-party information, specific industries targeted by the IRB, specific issues related to taxpayers, etc.
A tax investigation is another approach adopted by the IRB to examine documents relating to taxpayers’ business and financial matters, including their personal documents. While there is a limited period of review for tax audits, there is no limitation as to the investigation period, but it normally covers five years of assessment based on the IRB’s current practice.
The modus operandi of the IRB investigation officers is to carry out an inspection visit to taxpayers’ business premises, residences, tax agents’ premises and other related premises. Taxpayers may be chosen through a random selection and computer screening process. The basis of selection of investigation cases includes risk analysis, insider information, intelligence information, and information from other law enforcement agencies. During the Covid-19 situation, the IRB investigation officers have cancelled inspection visits. As an alternative, desk investigations that are similar to desk audits are carried out.
Taxpayers should be aware that a tax audit is merely an examination of records and does not imply that taxpayers have intentionally made errors in their income tax returns. Having said that, one should be prepared for a potential tax audit or investigation by keeping in mind the following information.
This article was first published in the Smart Investor (Sep/Oct 2021) issue.