LHDN audit Malaysia – tax audit process Malaysia – what triggers a tax audit – how to avoid tax penalties.
Tax audits can feel intimidating. Just the thought of the Inland Revenue Board (IRB) reviewing your accounts is enough to make any business owner or taxpayer uneasy. But the truth is, a tax audit isn’t always a bad thing – and if you’re prepared, it’s entirely survivable.
Let’s break it down, step by step, so you know exactly what to expect and how to handle it like a pro.
1. What is a tax audit?
Imagine this: You’ve submitted your income tax return, feeling confident that everything is in order. A few weeks or months later, you receive a letter or email from the Inland Revenue Board (LHDN), requesting additional documents to verify the information you submitted – such as your income, expenses, or tax relief claims.
That’s the beginning of a tax audit. But don’t worry – being selected for an audit doesn’t mean you’ve done anything wrong. In many cases, it’s simply part of LHDN’s routine checks to ensure everything adds up.
In Malaysia, our tax system operates on a self-assessment basis – also known as an honour system. This means taxpayers are expected to calculate their own taxes accurately, declare all income honestly, and keep supporting documents in case LHDN asks for verification.
A tax audit is simply LHDN’s way of double-checking that what you’ve declared matches your actual records. It’s not always a sign that something is wrong – some audits are random, while others are triggered by unusual patterns or discrepancies in your filing.
Think of it as a financial spot-check to ensure you’re in compliance with the Income Tax Act.
2. Types of audit: Desk vs field
LHDN conducts two main types of audits: the Desk Audit and the Field Audit. Each serves the same purpose – to verify that your tax return is accurate – but they differ in how detailed and involved the process is.
Desk audit
A desk audit is the most common and least intrusive type of tax audit. It’s conducted entirely from LHDN’s office – no one’s coming to visit your premises. Instead, it usually begins with a letter requesting specific documents or explanations related to your tax filing. You’ll be asked to submit supporting records such as invoices, bank statements, or a breakdown of your tax relief claims.
Desk audits are typically focused on straightforward issues or adjustments that can be resolved through correspondence. If everything checks out, the case is closed. If LHDN needs more clarity, you may be asked to attend an interview at their office or submit additional documents.
These documents are reviewed by an LHDN officer without visiting your premises. If everything checks out, the audit is closed. If discrepancies are found, you may receive an adjustment notice Form J? or be asked for further clarification.
Field Audit
Unlike desk audits, a field audit involves a visit from LHDN to your business premises. But don’t worry – it won’t come as a surprise. You’ll first receive an official letter informing you of the audit, including the date of the visit, the documents you need to prepare, and the names of the officers who will be conducting it. This is usually followed by a phone call to confirm the details.
Field audits tend to be more comprehensive than desk audits. While desk audits focus on selected items, field audits allow LHDN to review your overall tax compliance, including financial records, invoices, payments, and how your business operates in practice. Field audits can span a few days to several weeks, depending on the size of your business and complexity of your records.
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3. How Does a Tax Audit Work?
Here’s a simplified timeline of what usually happens in a tax audit:
Step 1: Audit Notification
You’ll receive a formal letter from the IRB informing you of the audit. This letter will include:
- The years of assessment being audited
- The information or documents required
- A deadline to respond (usually 21 days)
📌 Tip: Don’t delay. Respond early to buy time to gather your documents.
Step 2: Document Submission or Site Visit
Depending on the audit type:
- Desk Audit: You submit documents for IRB’s review
- Field Audit: Officers visit your premises to inspect your records
Make sure your documents are:
- Complete
- Organised
- Easy to understand
This includes:
- Bank statements
- Sales invoices
- Expense claims
- Payment vouchers
- Salary records
- Tax computations and supporting schedules
Step 3: Review and Discussion
This is the heart of the tax audit process—and also where things can get a little tense. But if you handle it right, it’s also your best chance to explain your position and minimise any potential tax adjustments.
Once the IRB has gone through your documents, they’ll usually get in touch to:
• Highlight discrepancies they found in your return vs. the supporting documents
• Question certain claims (e.g. high expenses, donations, reliefs, business deductions)
• Request clarification on how you arrived at specific figures
This stage is often called the exit conference or audit discussion. It may happen:
• In person at the IRB office
• At your premises (for field audits)
• Via email or phone (for desk audits)
4. Common Reasons You May Be Audited
So, what makes LHDN take a closer look at your tax return? While some audits are random, many are triggered by red flags in your submission – things that don’t quite add up, seem too good to be true, or deviate from the norm in your industry.
Here are some of the most common triggers that may raise eyebrows:
- Companies with repeated losses or no tax paid over multiple years
- Those with large or inconsistent tax filings
- Unusual fluctuations in income or profit margins
- Unusual tax refund claims
- Businesses operating in cash-heavy industries (e.g. F&B, retail, construction)
- Mismatch between what you declared and third-party data (e.g. bank info, employee filings, contractor payments)
- Related party transactions
- Late or incomplete submissions
- Donations, tax reliefs, or deductions
5. How Long Does It Take?
A desk audit can take a few weeks to a few months, depending on:
- How quickly you respond
- The complexity of the issue
- Whether LHDN needs further clarification
If there are no major issues, the case will be closed. If adjustments are needed, LHDN will issue a Notice of Additional Assessment (Form JA) along with any penalties (if applicable).
6. What Happens If You Don’t Provide Enough Information?
If you don’t respond to LHDN’s requests – or your documents are incomplete, unclear, or inconsistent – several things can happen, and none of them are pleasant.
Here’s what you might expect:
- Assumptions made against you: The IRB may estimate your income and issue a higher assessment
- Rejected tax reliefs or deductions
- Penalties and tax increases of up to 100% on the underpaid tax
- Escalation of audit into an investigation
7. How is the Final Outcome Decided?
So, you’ve submitted the requested documents — but the IRB still has questions. Maybe something doesn’t add up in your records, or they’ve made an adjustment you don’t agree with. Now’s the time to speak up.
If the IRB officer disagrees with your explanations, don’t panic. You have the right to explain your side of the story and provide clarification before the IRB finalises their findings. This discussion phase is often where misunderstandings can be cleared, penalties avoided, and outcomes improved . You’re allowed to challenge their findings—respectfully, of course. You can:
- Present further evidence or legal/tax references
- Request a review by a more senior officer*
- Negotiate a revised assessment based on mutual understanding
*This isn’t a guaranteed right enshrined in law, but in practice, IRB often allows it as part of good administrative process and fairness.
In many cases, IRB officers are open to compromise – especially if:
- You’re cooperative and transparent
- Your records are complete and properly organised
- You make a good case backed by facts, not feelings
After discussions, both sides will try to agree on:
- Adjustments to income or expenses
- The final tax payable (if any)
- Any penalties
Once both sides reach a consensus, the IRB will:
- Issue a final audit finding letter
- Send you a Notice of Additional Assessment (Form JA) if extra tax is due
- Impose penalties (if applicable), often between 15% to 45%
Payment is usually due within 30 days.
Not happy with the results? You can file an appeal with the Special Commissioners of Income Tax (SCIT)—but that’s a more formal and lengthy process.
Quick Tips to Stay Safe:
- Keep all tax records for at least 7 years
- File and pay your taxes on time
- Make sure your claims are accurate and supported
- Always respond to IRB’s letters or emails
- Talk to a tax professional when in doubt
Summary of penalties
If IRB finds issues during your tax audit — like incorrect declarations, late filings, or missing info — they can impose hefty penalties. Here are the main ones you should know:
1. Incorrect Tax Declaration
Section 113(2)
🔸 Penalty: Up to 100% of the underpaid tax
You might have miscalculated, claimed the wrong expense, or missed some income. Even without bad intent, IRB can still impose this.
2. Late Filing of Tax Return
Section 112(3)
🔸 Penalty: 10% + 5% if unpaid after 60 days
Just being late on Form C or BE? IRB will charge you extra.
3. Late Payment of Tax
Section 103(3)
🔸 Penalty: 10% + 5% on overdue tax
If you pay your taxes late, the penalty adds up — fast.
4. Failure to Submit Tax Return
Section 112(1)
🔸 Penalty: RM200–RM20,000 or jail (or both)
This is serious. If you skip filing entirely, expect a fine or even jail time.
5. Failure to Provide Info
Section 119(1)
🔸 Penalty: RM200–RM20,000 or jail (or both)
If you ignore audit letters or don’t submit records when asked, this kicks in.
