TAX INVESTIGATIONS AND FIELD AUDITS

TAX INVESTIGATIONS AND

FIELD AUDITS

Hong Kong Inland Revenue Department (“IRD”) Field Audit and Investigations

The possibility of being selected for a taxation audit is increasing each year as the Inland Revenue Department widens the scope of its audit activity. In recent years, the IRD has taken a strong stance to ensure taxpayers comply with their obligations under the current tax legislation in the Hong Kong Special Administrative Region.

A key measure employed by the IRD to combat tax evasion and tax avoidance is field audits and tax investigations on suspected businesses and individuals. In most cases, field audits and tax investigations only lead to collection of undercharged tax and imposition of penalties, there are some cases where taxpayers have been prosecuted for tax understatements or, more seriously, willful evasion of tax.

Any taxpayer may become the subject of a field audit or tax investigation. However, the likelihood of being targeted for a tax audit is highest among those whose tax returns reveal that:

They have made apparently large or unusual claims, particularly in respect to work-related expenses or rental properties.
Their declared income is below the average for their industry or occupation.
Their deductions, or their ratio of deductions, are above the average for their industry or occupation.
There is a discrepancy between payments declared in their tax returns and those provided by financial institutions.
The relevant tax authorities may also obtain information from other sources (including from questionnaires sent to tax payers on specific topics) that raises suspicion of some form of non-compliance warranting audit action.

Businesses which attract the attention of the audit teams are those that appear to have:

Not recorded all sales.
Overstated purchases
Used business capital for non-business purposes.
Unsubstantiated expenses claims
Little or low directors salaries paid from company account, but with a lifestyle out of sync with their reported income
Ppersistent failure or delay in submission of tax returns
Heavily qualified auditors’ reports
Unreasonably low turnover or profit margin as compared to industry average
Substantial capital injection or acquisition of private assets
Large estate succession
Failure to keep proper business records/provide information requested

Audits are conducted in a variety of ways but usually by face-to-face meetings with the audit officers. If you are selected for an audit, you will receive written notification and you may also receive verbal notification as well. Whether by mail or by interview, you will be asked to explain your reasons for any omitted income or excessive deductions. You may be asked to produce receipts or other documentation to support your claims. You may be required to provide access to your business premises and residence at mutually agreed times and provide reasonable facilities, such as cleared space in which the audit officers may work.

Audit officers also interview taxpayers at their business premises to ask questions about their record-keeping procedures and may also examine their records. All taxpayers are required by law to keep proper books and records and failure to do so will attract a fine at level 6.

What to expect

The Hong Kong IRD instructs its audit officers to adhere to a set of principles in carrying out audits. These principles entitle audit subjects to expect that audit officers will:

Produce identification at the first meeting and explain the purpose of any interview or visit.
Act in a professional and courteous manner and show fairness and impartiality in the conduct of the audit.
Give taxpayers reasonable time to collect records, documents and papers required for an audit and to gather information on any other matter that might arise during an audit.
Arrange interviews with tax payers at mutually convenient times, usually during normal business hours.

Professional support

You do not have to face an audit alone. You may choose to have your accountant present at any meeting or interview. As your professional advisor, we will be able to properly prepare your case and put it in the best light possible and answer all technical questions you may have before the interview.

How can we help:

Pre audit risk analysis

We offer a risk analysis service, which will examine the critical areas identified by the IRD in their field audits examinations to see where the company currently stands and carryout measures to remedy the situation if necessary.

As field audits are usually carried out on the latest submission, with adjustments projected back to prior periods, it is therefore critical to carry out this process as early as possible. It is often too late when the client received a notice to interview and clients are well advised to carry out the analysis before getting to that stage.

During the field audit process

If you become the subject of a field audit or tax investigation. We can provide assistance:

Conduct preliminary review and analysis
Identify potential risks
Assess possibility of criminal charges
Collate and present mitigating factors to the IRD
Enhance the IRD’s perception of your co-operation
Assist you to prepare for the interview
Get you prepared psychologically and technically for the interview
Attend the interview with you
Reduce direct interaction with the IRD
Avoid unexpected challenges from the IRD
Protect your rights and interests during the initial interview
Follow-up and negotiation with the IRD
Preparation and submission of compromised settlement proposal
Speed up the negotiation process to facilitate a more timely settlement
Achieve optimum settlement terms
Negotiation on penalty

Post field audit or tax investigation

It is crucial that a complete review of business operations be conducted shortly after the settlement of a field audit or tax investigation. Even if a compromised settlement is reached with the IRD for previous years of assessment, there is no guarantee that the IRD would agree to the same basis being applied for future years of assessment.

The taxpayer may need to restructure part or even the whole of the business organisation and operations for both Hong Kong and overseas so as to ensure that the taxpayer and its business comply with the current tax laws and practices in Hong Kong.

We can also assist taxpayer with our full range of post field audit services, which include:

Documentation review
Tax compliance
Group restructuring analysis and implementation
Advice on business operations.

Our aim is to ensure that the taxpayer and its business are in compliance with the current tax requirements whilst minimising the adverse impact on the efficiency of the business operations.