Are you prepared for Tax Audit?

With the implementation of Self Assessment System (“SAS”) by the Inland Revenue Board (“IRB”), tax audits become one of IRB’s main activities. SAS for companies were implemented in 2001, whereas for individuals and businesses, in 2004.

SAS is a system where by taxpayers (both individuals and companies) are required to compute their own taxes and make full payments to the IRB. Further, taxpayers are required to estimate tax payments for current financial year and make installment payments for the estimated amount.

What IRB does is to ensure the taxes reported and paid by taxpayers are correctly prepared; so to conduct tax audits. IRB’s selection process for tax audits is by way of reviewing assessment submissions for irregularities in financial ratios and supply of information by third party, among the others. In 2008, the IRB has conducted nearly 15,000 field audits and more than 1 million cases of desk audits.

Desk Audit

This is where IRB will send letters to selected taxpayers, requesting for documents to support the assessment submitted. What IRB does is to review the documents upon receiving from the taxpayers, and find out if the assessments are correctly prepared.

Within 2 to 3 weeks after the audit, IRB will notify the taxpayer whether additional tax payments need to be made. If IRB’s review shows overpaid taxes, a refund will be made to the taxpayer. Desk audits are normally applicable to individual and small businesses.

Field Audit

Field audit is where IRB officers will audit the taxpayers’ records at their premises. IRB will serve a 14 day notice to the taxpayers to prepare the necessary documents and records. There will be at least 2 officers to conduct each audit, and their names will be given in the notice.

Sometimes, IRB may conduct field audits on tax assessments up to 3 years back. Should there be discrepancy between the records and the assessment submitted, tax assessment will be amended accordingly and the taxpayer will be notified within 3 months after the audit. Field audits are for businesses and companies.

Disagreement with IRB Findings

If taxpayers disagree with the findings, they can first contact IRB to raise their disagreement. IRB will reassess the documents, records and computations of their initial findings. If after the reassessment and the IRB maintains their findings, the taxpayer has the right to bring the dispute to the Special Commissioners of Income Tax.

There is no way to avoid tax audits but all taxpayers can ensure that tax audit is performed smoothly by maintaining proper records and documentation, especially for businesses and companies. To IRB, records are evidence of transactions. Tax assessments are compilation of these evidences. Therefore, face values of records that are available to the IRB officers are taken as final proof. Any discrepancies between the records and the tax assessment submitted will be reflected with adjustment to the tax amount.

According to Section 82 of the Income Tax Act, 1967, taxpayers are required to keep accounting records for at least 7 years. In fact, it is prudent not to dispose of any old records, even after 7 years. There are many instances where IRB will audit tax assessments that are more than 7 years old – If they suspect those assessments were incorrect. It would be at the taxpayer’s disadvantage if they have no records to substantiate their case.