Malaysia Tax Audit: Rules, Regulations, and Framework

Self-assessment is a common practice among businesses, but it's prone to errors and fraud, leading to discrepancies in reported income, expenses, and taxes. To mitigate this, the Inland Revenue Board of Malaysia (IRBM) carefully selects businesses for audits using internal criteria. During these audits, the IRBM reviews financial records, checks expenses and revenue, and recalculates taxes to ensure compliance. 

Tax audits can often be a significant burden for businesses facing scrutiny. This blog explores tax audits in Malaysia, covering the types of audits, step-by-step procedures, and penalties.

What is a Tax Audit?

The Inland Revenue Board conducts a tax audit in Malaysia as a review process to ensure that businesses accurately report their income and calculate their taxes based on the Income Tax Return Form. The audit includes:

• examining financial records
• verifying expenses and revenue
• recalculating taxes

The IRBM selects businesses for audits using internal criteria such as discrepancies in reported income or expenses. It is carried out through desk audits or field audits, depending on the complexity of the issues.  The audit process is designed to maintain tax compliance, deter fraud, and ensure that businesses meet their tax obligations. 

Types of Tax Audit

In Malaysia, the Inland Revenue Board conducts two types of audits:

Desk Audit

• Conducted at the IRBM’s office
• Focuses on straightforward issues
• Involves examining records and data submitted electronically or via email

Field Audit

• Conducted at the taxpayer’s premises
• Deals with complex issues
• Includes a detailed review of all relevant supporting documentation and in-person

Malaysia Tax Audit Framework IHDN

To provide a fair, open, and unbiased tax audit procedure, IRBM created the Malaysia Tax Audit Framework. It aims to implement tax regulations under the Income Tax Act 1967 (ITA). It also encourages voluntary compliance and increases public trust in the tax system. It defines the rights and responsibilities of:

• Audit officers to perform tasks efficiently and impartially
• Taxpayers to fulfill legal obligations and cooperate with IRBM
• Tax agents to assist taxpayers during audits

Tax Audit Process in Malaysia

Now that you know what is tax audit IHDN, here's how the systematic process of a tax audit in Malaysia typically unfolds:

1. Selection of File

IRBM uses a systematic approach to select files for tax audits. The process is driven by risk analysis, industry-specific issues, and data analytics. Here are some common triggering points:  

• Significant fluctuations in income or expenditure  
• Businesses consistently reporting losses  
• Expenses not aligned with reported income  
• Failure to file tax returns  
• Conflicting or inaccurate information  

The following are the selection criteria that may lead to an audit:  

• Risk analysis via big data analytics
• Specific taxpayer groups
• Targeted areas or regions
• Industry focus
• Third-party information
• Large tax refunds
• Transfer pricing cases
• Internal IRBM references
• Tax evasion
• Tax incentive compliance 

2. Notification of Tax Audit

A taxpayer is informed of an audit through the Request for Documents and Information Letter or Notification of Audit Letter. However, in certain desk audit cases, no prior letter is issued. Instead, the IRBM directly sends a Notice of Assessment with adjustments. For field audits, taxpayers are given a 14-day period between receiving the notification and the audit visit.

2. Preparation and Documentation

• Taxpayers must provide authentic, accurate, and complete supporting documents. This is required by Section 82 and 82A of the Income Tax Act 1967.
• Common challenges include locating old documents, especially during periods of remote work. In these cases, access to physical records stored in warehouses may be limited.
• Documents can be submitted electronically if originally issued in electronic form.

3. Audit Visit and Information Gathering

• During a field audit, IRBM officers may access and download records from the taxpayer's computer systems, servers, or other devices.
• An interview process is conducted with the taxpayer or their tax agent. It often requires presentation slides covering:
• Company background and business operations in Malaysia
• Global business operations and management structure
• Accounting software details
• Location of financial records
• Manufacturing processes for manufacturing companies

4. Audit Findings and Response Period

• After the review, the IRBM issues a report detailing their findings.
• Taxpayers have 18 days to respond with an official objection letter, supporting documents, or evidence if they disagree with the findings.

5. Finalisation of the Audit

• If adjustments are made, the IRBM issues a Notice of Assessment or Notice of Additional Assessment.
• Cases that don’t need adjustments result in a Tax Clearance Letter.

6. Post-Audit Considerations

• The same issue is not revisited for the same year of assessment.
• For cases exceeding three months, the IRBM updates taxpayers on the audit’s progress.

Common Tax Audit Issues and Risks 

You may face certain issues and risks during these audits. Here are some common ones:

• Understating income or misclassifying it as capital gains
• Claiming non-business or capital expenses as deductions
• Mispricing transactions or lacking proper documentation
• Failure to remit taxes on payments to non-residents
• Incorrect computations or misusing tax incentives
• Inadequate documentation to support claims
• Deliberately falsifying records or hiding taxable income
• Missing deadlines or failing to file returns entirely

How to Prepare Your Business for a Tax Audit

Staying proactive and organized can help you ensure smoother tax audits. Here’s how:

• Keep up-to-date financial transaction records. Ensure all receipts, invoices, and financial documents are properly organized.
• Adhere to Malaysian tax laws and filing deadlines. Meet documentation requirements for tax submissions.
• Perform internal tax checks to identify potential gaps. Engage professional tax consultants for expert insights.
• Comply with regulations for intercompany transactions to avoid penalties.
• Prepare and maintain all necessary documents for transactions with related parties. Ensure the documentation supports pricing and compliance with tax laws.

Penalties and Fines 

Under the Tax Audit Framework, penalties are imposed for compliance with tax laws. These penalties vary based on the nature of the offense and the taxpayer's actions:

Conclusion 

In Malaysia, a tax audit, whether desk or field, involves a detailed review by the Inland Revenue Board of Malaysia to confirm accurate income reporting and tax computation. 

• Maintain accurate records in compliance with Sections 82 and 82A of the ITA for smooth audits.
• Taxpayers have 18 days to address audit findings with proper documentation and objections if needed.
• Be familiar with penalty rates under subsection 113(2) ACP. They range from 15% for first offenses to 100% for tax fraud cases.
• Proactively disclosing errors can lower penalties. That’s particularly when done within 6 months of the filing deadline.