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The Sun Daily: How do you tackle tax audits?

Repost of publication on The Sun Daily on 28 December 2020.
EXPECT the Inland Revenue Board (IRB) to increase substantially the volume of tax audits in 2021. The intention is twofold: To meet the 2021 target of RM132 billion and to educate taxpayers to improve their compliance with the tax laws.

Although the IRB is accommodative to taxpayers, the climate has changed where the IRB is more thorough in carrying out their scrutiny and identifying issues. They are also firmer in holding their positions and are prepared to take the issues to court.

It is very important that a tax audit is handled correctly. Once an assessment is issued, the taxpayer must pay the tax within 30 days of the issuance of the assessment and thereafter litigate in the courts which will take many years to resolve. In most cases where there are tax adjustments, there will be penalties to accompany the tax assessment. This can range from 25% to 100%. This puts the taxpayer at a severe cash disadvantage even though the taxpayer has grounds to support his position.

Communication and evidence is the answer

The majority of taxpayers file their tax returns diligently in accordance with the tax laws. Disputes arise in tax audits where the IRB may not be aware of the background facts such as the business model or the circumstances surrounding the particular transaction. Therefore, it is important that the taxpayer provides full information and evidence to support his position. It is equally important to communicate continuously with the tax officials to find out their concerns and address them immediately before they move in a different direction.

There is a need for two-way communication. Disputes arise frequently because either one of the parties does not communicate or does not share the other party’s views.

Taxpayers cannot assume that the information contained in the tax returns or the accounts will be sufficient for the tax auditor. It is extremely important that more than sufficient evidence is provided right at the beginning of the audit to ensure the IRB understands the circumstance under which the tax return was prepared.

Keeping records is crucial

In many cases, the lack of records in recording the positions taken in the tax return puts the taxpayers in a disadvantage because audits occur many years after the returns have been filed. Many taxpayers cannot recollect the reasons for taking the positions, and records to support such positions are usually missing. Unfortunately, this allows the IRB to raise assessments which the taxpayer will have difficulty defending.

Tax authorities are not always correct

Where the taxpayer has sufficient evidence and support in law, he should ensure that this is communicated to the tax officials and, if necessary, provide explanation on the tax laws, case laws to ensure that his intention is understood. This is to ensure that both parties do not unnecessarily spend time litigating in the courts.

How to close the audit?

In practice, the majority of the cases are settled at the IRB level through negotiations. It is best that discussions and negotiations be held with the tax officials before they issue an assessment.

In the event an assessment is issued, there is still room for settling the case without going to the courts through the Dispute Resolution (DRP) process. This is another opportunity to present your case to an independent group of officers from the IRB. In practice, the DRP is willing to mediate between the taxpayer and the IRB to resolve matters amicably.