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[Tax evasion cases] What are field audits and tax investigations? What are the signs that might be the cause of an investigation?

[Tax Evasion Cases] On-site audits and tax investigations are the means of law enforcement by the Inland Revenue Department to combat tax evasion and other violations by taxpayers. Once a case is filed for investigation, the consequences may vary, and may result in a fine or criminal prosecution by the Inland Revenue Department.

In order to reduce the occurrence of this situation, this article summarizes the relevant information of on-site audit and tax investigation for taxpayers’ reference, and can be consulted by Mexus accounting to reach the most favorable tax solution.

Tax assessment system of the Inland Revenue Department

In order to effectively implement the “Inland Revenue Ordinance”, the Inland Revenue Department will regard tax evasion, tax avoidance and tax concealment as serious violations and impose heavy penalties.

To this end, since 2001, the Inland Revenue Department has adopted a streamlined tax assessment process, using a computerized system to “assess first and then review”, which involves the “audit trilogy”, in order to minimize the risk of tax loss:

• “Desk audit” – the system automatically selects some cases for review by the fourth tax assessor according to the situation;

• “Field audit” – on-site audit by auditors;

• “Tax Investigation” – In-depth tax investigation by investigators.

Field audit and Investigation

Once the Inland Revenue Department suspects that a taxpayer has committed tax evasion, tax avoidance and tax concealment, it will authorize tax assessors to conduct “Desk audit” and “Tax investigation” in accordance with the “Inland Revenue Ordinance”., and even the financial situation of the family, etc.

In addition, if the taxpayer uses an “overly aggressive” plan to avoid tax, it may be classified as an anti-avoidance case.

Field audit

When a taxpayer is found to have signs of non-compliance with tax regulations, an on-site audit is usually carried out, mainly to examine the taxpayer’s accounting books and records, and to visit its business premises to ensure that the information in the tax return is correct. The focus of the audit is generally on the tax returns submitted for the recent tax year, and on-site auditors will calculate the difference in the previous tax year based on the results, and determine the amount of under-reported profits.

Tax Investigation

If the Assessor believes that the taxpayer is suspected of tax evasion (usually a very serious case, or criminal prosecution), a more in-depth “tax investigation” will be conducted and punitive action will be taken against the taxpayer suspected of tax evasion. The scope of the investigation is normally from the year of assessment in which the action is commenced and is advanced 6 years of assessment. If a case of fraud or deliberate tax evasion is found, the scope of the investigation will be extended to 10 years of assessment.

The process of tax investigation

Collection of background checks: including accounting records, bank income and expenditure, etc.;

Initial meeting with the tax assessor of the Inland Revenue Department (more information may be required);

Staff visit relevant premises to learn about the operation of the enterprise;

Submit a solution to reach consensus and impose penalties or issue additional assessments if under-reporting/tax concealment is found.

Possible signs of being the subject of an investigation

Generally speaking, when the Inland Revenue Department finds that certain companies have the following signs or do not meet certain criteria, they may lead to on-site inspections and tax investigations. Examples of tax evasion are mostly cash transactions or industries involving commissions. Suspected by the Inland Revenue Department, so you need to pay more attention:

• a third party informs the Inland Revenue Department;

• Failure to provide important information to the Assessor;

• Referral to the Inland Revenue Department through other government departments;

• Tax evasion by corporations and affiliates – conducting numerous suspicious transactions;

• Business expenditures have unsolicited funds or private expenses;

• The company’s financial and business records are incomplete/inadequately maintained;

• Failure to file tax returns on time / failure to file tax returns for many years;

• In the audit report, the auditor has issued a qualified opinion on the accounts;

• Unreasonably low profitability compared to peers, but continued operations;

However, the most easily recognizable “sign” is when a taxpayer receives a letter from the IRD with file number 4A, 4B or 4C, which means that the IRD will investigate the case.

The above information is for reference only. If you have any questions about field audit and tax investigation (Field audit, Tax investigation), we welcome your inquiry.

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