Tax investigations play a crucial role in ascertaining whether the correct amount of
income has been reported and whether taxes have been calculated and paid in accordance with the tax laws and regulations by taxpayers. The aim is to determine if there are any under-declarations or omissions of income by taxpayers. Tax investigations involve the examination of documents related to a taxpayer’s business and financial affairs, including personal documents. The tax investigator will take custody of the required documents and books of accounts for investigation
purposes.
The main objectives of conducting a tax investigation are:
- To deter tax evasion;
- To identify and prosecute tax evaders;
- To enhance voluntary tax compliance;
- To be fair to compliant taxpayers; and
- To collect the correct amount of tax.
What is the difference between a tax audit and a tax investigation?
The main difference between a tax investigation and a tax audit is that a tax audit is merely an
examination of records that focuses on determining the accuracy of a taxpayer's income tax returns. However, a tax investigation is carried out based on precise and definite evidence that a taxpayer is deliberately trying to avoid paying taxes or has committed an act of wilful evasion under the tax laws.
Additionally, a tax audit is not
conducted unexpectedly; the owner will be informed prior to any action. Whereas, a tax investigation is typically conducted without prior notice, which may involve visits to the taxpayer's business premises, residences, and even tax agent’s and third party’s premises. In short, the taxpayer is not informed in advance of a tax investigation.
Moreover, the review period for a tax audit typically spans from 3 to 5 years of assessment. In
the case of a tax investigation, there is no time limit regarding the period of investigation. The IRB can raise assessment or additional assessment for cases involving fraud, wilful default or negligence at any time.
How does tax investigation work?
An investigation can be carried out by issuing letters requesting documents and information from the taxpayer, tax agents and third parties. The taxpayer may be required to provide information and give an oral explanation at LHDN offices. Subsequently, inspection visits will be conducted without prior notice to the taxpayer's business premises, residences, tax agent's premises, third parties and other
necessary locations.
LHDN officers will examine the taxpayer’s business documents and/or personal documents to gather evidence of tax evasion. Meanwhile, the officers may also request taxpayers to provide documents in their custody or control. Additionally, during the recording of statements from individuals related to the investigation, at
least two LHDN officers will be presented. Nevertheless, qualified lawyers can be present during the recording of statements. Once the investigation procedures are completed, the IRB will issue a letter to the taxpayer confirming the conclusion of the investigation.
Taxpayers are expected to cooperate fully with the IRB throughout the tax
investigation process. Failure to do so may result in additional assessments, penalties, fines, and even imprisonment in cases of tax offences such as fraud, wilful defraud, or negligence.
