Under the Self Assessment System, the burden of computing the taxpayer’s liability is shifted from the Inland Revenue Board (IRB) to the taxpayer and accordingly, taxpayers are expected to compute their tax liability based on the tax laws, guidelines and rulings issued by the IRB.
The Income Tax Returns (Form C) submitted by the companies will no longer be subject to a detailed review by the IRB.
The main objective of the Self Assessment System is to inculcate a practice of voluntary compliance by the taxpayers and at the same time reduce the workload of the IRB to enable them to concentrate on areas which have a high tax risk and a potentially significant loss in revenue.
The implementation of the self assessment system has also resulted in changes to the tax compliance cycle and the penalty provisions. These changes are explained in greater detail below.
Tax Audits by IRB
Under Self Assessment System, tax audits will be IRB’s key enforcement tools to ensure that the tax returns submitted are correct and have been prepared in accordance with the provisions of the laws, guidelines and rulings issued by IRB.
Essentially, an audit is an examination of a taxpayer’s records to ensure that the income and tax liability declared to the IRB in the Income Tax Return are true, correct and comply with the tax laws and rulings.
Desk Audit and Field Audit
IRB carries out 2 types of audits, namely Desk Audit and Field Audit.
The Desk Audit will involve the review of documents or information obtained by correspondence and interviews at the IRB’s offices whilst the Field Audit would entail a visit to the taxpayer’s premises for a detailed review of all revelant documents.
Cases for audit are selected through the computerised system based on risk analysis criteria and on various criteria such as business performance, financial ratios, type of industry, past compliance records, third party information, etc.
How does the IRB Conduct an Audit?
Once a taxpayer is selected for an audit, the IRB will inform the taxpayer via a telephone call followed by an official notification letter sent via mail or fax.
The period between the date of notification and the audit visit is 14 days. A shorter period of notification may be fixed by IRB with the consent of the taxpayer.
The scope of a tax audit under the self assessment system normally covers a period of 1 to 3 years, unless there are valid reasons to go beyond that period. The time frame for the conclusion of a tax audit is normally within 3 months.
Upon the completion of an audit, the IRB will issue a tax computation summarising the tax adjustments based on their findings and subsequently an additional assessment to collect the additional taxes from the taxpayer.
The taxpayer may still appeal against this assessment by submitting the appeal, through the prescribed Form Q to the Special Commisioners of Income Tax within 30 days from when the assessment is raised.
With effect from 1 Jan 2014, the time-bar for tax audits is reduced from 6 years to 5 years.
Penalty Provisions under Tax Audit System
(a) Penalties for omission/non-disclosure
Under the tax audit system, the IRB has also introduced a new penalty regime for non-disclosure and omission of information that affects a taxpayer’s tax liability. The penalty regime is summarised as follows:
|Voluntary disclosure before selection for audit||Within 60 days from the due date for furnishing the return form||10%|
|More than 60 days but less than 6 months form the due date for furnishing the return form||15.5%|
|6 months to 1 year||20%|
|1 year to 3 years||25%|
|3 years & above||30%|
|Voluntary disclosure after the case is selected for audit but before audit commences||35%|
|Non-disclosure (discovery during audit)||100% of tax undercharged (may consider for 45% for 1st offence)|
|Repeated offences||+10% for each repeated offence not exceeding 100%|
(b) Penalty for not providing reasonable facilities and assistance
Based on Public Ruling 7/2000, failure by a taxpayer to provide reasonable facilities and assistance to the IRB when conducting an audit is an offence and upon conviction, the taxpayer may be liable to a fine of between RM1,000 to RM10,000 or face imprisonment for a term not exceeding 1 year or both.
(c) Failure to keep sufficient records
The company or persons responsible, upon conviction will be liable to a fine of between RM200 to RM2,000 or face imprisonment for a term not exceeding 6 months or both.