WHEN Tax audits began in the 2000s. The initial goal was to improve and increase voluntary tax compliance and to educate taxpayers to avoid mistakes and know their rights and obligations under the Income Tax Act.

Originally, tax inspectors focused more on explaining the laws and regulations to taxpayers. Recently, however, this focus seems to have shifted to collecting taxes and imposing penalties.

Malaysia has a low tax rate of 11.8%. The World Bank recommends a rate of 15% or more.

Malaysia’s tax authorities are under pressure to collect more taxes. To close the gap, the focus should not be on existing taxpayers who are diligent in filing their tax returns, but on tracking down tax evaders and bringing them into the tax system.

The widening of the tax net needs to be accelerated. This is already happening to some extent through the introduction of electronic invoicing, which increases transparency and reduces leakages.

What happens now?

Currently, taxpayers who are in the system are facing audits more and more frequently. The problems encountered during the audits are often technical in nature or there are disputes about the reliability of the evidence presented. Undoubtedly, there are cases where taxpayers have not maintained proper documentation or taxpayers have deliberately attempted to defraud the Inland Revenue Board (IRB). In such cases, the IRB is correct in assessing such errant taxpayers.

However, the relationship between taxpayers and the IRB is not improving, and may even be getting worse, because the IRB often argues with taxpayers rather than giving them the benefit of the doubt. The educational aspect of tax audits is now missing, and the task seems to be more focused on collecting taxes and imposing penalties.

If this climate continues, taxpayers will become defensive and more cases may end up in court, which would be unproductive for both taxpayers and the IRB. Taxpayers will also plan their tax affairs to minimize their taxes and be prepared for tax audits.

Where should we move?

No one will object if the IRB imposes additional taxes on taxpayers who do not comply with the law. However, there is no need to impose penalties on first-time payers. We need to go back to the old practice where penalties are imposed only when the same mistakes are repeated, and the rate will increase if a taxpayer repeatedly makes the same mistakes. However, if the tax problems identified can go both ways, the taxpayer should be given the benefit of the doubt and no additional taxes should be imposed.

Harmony versus confrontation

Tax audits are a great way to engage taxpayers and educate them on the application of the law to improve voluntary compliance. It is not a tool to just collect taxes and penalties. We need to change the climate to encourage taxpayers to contact the IRB well before an audit, and during the audit, IRB staff should build relationships so taxpayers can come back to them if they have any doubts.

There is no danger that there will be negative consequences if you talk to IRB officials, get their views and advice, and apply them. It is difficult, but this is a process of engagement that must be initiated at some point.

When a tax audit is initiated these days, taxpayers are always afraid of additional tax liability. This should not be the case.

This article was contributed by SM Thanneermalai, Managing Director of Thannees Tax Consulting Services Sdn Bhd (www.thannees.com).