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What To Do When Your Business Gets Tax Audited
So you’ve paid your taxes and submitted all your returns already (and if you haven’t, don’t forget that the deadline this year is 18 April 2021). You can dust your hands off and be done with this whole tax process at least until next year, isn’t it?
Well, maybe not.
You and your business could still be subjected to an audit from the Inland Revenue Authority of Singapore (IRAS).
What is a tax audit?
Audits involve reviewing your income generating activities to ensure that the information in the tax return provided is accurate. IRAS will examine your accounting books, records, and financial affairs to verify that income tax returns submitted are in compliance with tax laws.
They will also check if your supplies are classified correctly, if GST was properly charged and accounted for, if input tax was claimed correctly, and if the values of supplies, purchases, and taxes reported are complete.
According to IRAS, the tax audit programme has three purposes:
Ensure your business' tax returns are in compliance with the tax law;
Educate your business on your tax obligations and how to comply; and
Identify tax laws, policies and processes where IRAS can simplify or clarify.
It is safe to say that all industries are susceptible to audits. Within each industry, IRAS generally adopts a risk-based approach in selecting which businesses to audit. They also conduct periodic audits just to check the general level of compliance.
Being selected for an audit does not mean that the IRAS has assumed your company has made any errors in its tax returns, so if you have done your due diligence then there is no need to worry.
What does the tax audit process involve?
An audit can be conducted via emails, letters and telephone interviews. IRAS may also visit your premises or request to meet your key personnel and employees. If they wish to do so, they will first inform your business of the field visit by letter, email, or telephone.
IRAS will also provide the details such as the timing of the audit, and the documents/books that IRAS will examine, and the Years of Assessment (YA) to be audited primarily.
On the date of the field visit, a team of tax officers will arrive at your premises, usually beginning with an initial interview to obtain the following background information:
Size and nature of your business;
Operations of your business;
Organisational structure including duties of key management personnel; and
Accounting and book-keeping procedures and internal control procedures of your business.
Subsequently, they will require you to furnish certain documents for them to review. These include:
Source documents that substantiate all transactions in your business, e.g. receipts, invoices, vouchers, and other relevant documents issued or received from customers/suppliers;
Accounting records and schedules - manual or electronic records of assets and liabilities, revenue and expenses, gains (profit) and losses. Where accounting information is stored in electronic format, you are advised to make the information available on the date of visit;
Bank statements of business bank accounts and personal bank accounts, if required;
Sales and purchases listings to verify the accuracy of the figures reported in your GST returns;
Completed self-review checklists (e.g. self-review form for pre-registration input tax claims, bad debt relief).
IRAS may also obtain information from third parties, such as seeking confirmation from your customers, suppliers and/or banks to determine if the transactions you reported in your GST returns are genuine.
Depending on the scope of the audit (and your standard of record keeping), a field visit may last longer than a day, and the tax officers may then have to arrange to re-visit the premises on another day.
Responsibilities of taxpayers
During the audit, the tax officers will require your cooperation in the following ways:
Provide them with full access to your premises, records and documents;
Make available a room or working space for the auditors to conduct the examination of books and records;
Allow your employees to be interviewed;
Allow them to make copies or obtain extracts of records and documents;
Provide timely, complete and accurate replies to requests for information; and
Be truthful and honest, full disclosure of irregularities and omissions should be made at the earliest possible time.
Under Section 65B of the Income Tax Act, the Comptroller or any officer authorised by him has the power to obtain information. It is an offence for any person who fails to or neglects to comply without any reasonable excuse.
Under Section 98 of the Income Tax Act, it is an offence for any person to obstruct or hinder any officer discharging his duty under the Income Tax Act. Any person guilty of this offence is liable to a fine of up to $1,000 and imprisonment of up to six months (in default of payment).
How will an audit be concluded?
Most audits are completed within 12 months. You will then be notified of the outcome, either in writing or through a meeting at IRAS.
Assessments may be raised to make adjustments to your reported values and penalties may be imposed for additional tax payable. The basis of these will be explained. Issues are generally discussed with a view to reaching a mutually acceptable conclusion. You may also be advised on areas in which you could make improvements to better comply with the tax laws.
If you disagree with the assessment, you may file an objection. This has to be done in writing, within 30 days, stating the specific grounds of objection. Notwithstanding any objection, the additional tax payable imposed, if any, must be paid within one month from the date of the Notice of Assessment.
What are the penalties for failing a tax audit?
It is an offence, under Section 95 of the Income Tax Act, to make an incorrect return by omitting or understating income or giving any incorrect information related to any matter affecting his own tax liability, or the liability of any other person or of a partnership.
However, IRAS believes that taxpayers are generally compliant and that most non-compliance arises from negligence or insufficient understanding in tax matters. As such, they are wont to temper their approach based on their assessment on how voluntarily compliant the audited company is.
For taxpayers who may be negligent in the filing of their tax returns, IRAS can impose penalties for additional tax payable, the amount of which will depend on the discrepancies found within the tax returns, as well as provide advice on how to prevent said problems from occurring again. As mentioned above, these issues are generally discussed with a view to reaching a mutually acceptable conclusion
However, serious cases of omission or errors from errant taxpayers believed to be deliberately trying to evade taxes may be subject to court prosecution. This could lead to not just penalties but also an additional fine and even imprisonment.
What are some common mistakes taxpayers are likely to make?
IRAS has listed some of the most common issues and mistakes that they have come across in the course of their audit checks, and you can check them out here.
For GST-related errors found during GST audits on businesses, you can refer to the common mistakes stated here from past audits.
Practice vigilance in complying with tax laws
To improve compliance with tax laws, your business is encouraged to:
Engage personnel with sound income tax and GST knowledge
Practise good record-keeping
Use a computerised accounting system. You may refer to the Accounting Software Register for a list of accounting software where the software developers have been reviewed to ensure that the accounting software is compliant with IRAS' technical requirements. (Remember that you can tap on the Productivity Solutions Grant to do so!)
Have good internal controls
For GST compliance, a self-assessment package has been provided by IRAS to help businesses self-assess their GST submissions and to discover past GST errors early.
Read also: Singapore Income Tax: Are Your Jobs Support Scheme (JSS) or Job Growth Incentives (JGI) COVID-19-Related Payouts Taxable?
Read also: 2021 [PSG Approved] - Top HR & Payroll Software for Singapore SMEs
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