How to Survive an IRB Audit

You would be right. Most of the time, the odds of the average person being audited are pretty slim in any given year. Most of us get through our tax returns without any significant problems. Most of us figure the IRB has bigger fish to fry. 

But as the saying goes, it’s best to hope for the best but be prepared for the worst. Let’s look at a few things you can do to be well-prepared if you’re chosen for an audit.

Before You Get Audited

Keep good records. If you’re not organised, now is the time to start. 

Keep at least 7 years of tax returns and all the associated documents, bills, receipts, and other items as appropriate. This would include any records related to your income, investments, or tax deductions.

If the IRB disputes any of your figures, you’ll have to have the documentation to back them up. For example, if you don’t have the documentation for a deduction, they may disallow that deduction altogether.

Record keeping is an ongoing process. Take care of your records as you accrue them, rather than just once a year. 

If you are really reluctant to deal with them frequently, prepare a box for the receipts and documents related to your tax. With a designated bin for tax documentation, you know where to drop them as you come across them. 

Another suggestion is to keep a folder in the car, just throw the receipts in them and drop them in the bin periodically. That way, the chances of you missing essential records will reduce significantly. 

Watch your red flags. Here are 9 of the things the IRB tends to look for when choosing tax returns to audit:

Large business expenses. Small business owners sometimes try to deduct nearly every payment they have. The IRB knows this. Be careful.

Your “friends.” If you’re not complying with tax rules, it’s not uncommon for the IRB to get a tip from a friend, family member, or co-worker. The solution is to not do anything wrong in the first place. Don’t tell anyone anything that can come back to haunt you if you did.

Complexity. If your business or investment transactions are very complex, the IRB might believe you likely made a mistake somewhere.

Large Charitable Deductions. If you give significantly more to charity than others in a similar financial situation, the IRB will take a pause. Also, if your charitable donations increase dramatically, the IRB will be curious.

Inaccuracies on your BE or CP58 vs EA Form. They figure if the essential documentation is wrong, there must be other things wrong.

Industry-wide audit. Each year IRB will select a specific industry for a tax audit. If you start seeing many of your friends from the same sectors, it should ring a bell. There is a high chance you might get audited too. Probably you should be more alert and be prepared too. For example, if you hear your fellow doctors are audited, you may want to be on the lookout. 

Chain of suppliers. It is also a common practice when IRB audits big companies; they will pick the suppliers for audit too. They can verify the big company’s recorded expenses while verifying the income received by the supplier. They are killing two birds with one stone. 

Owed a refund. Before IRB make a refund, they would like to audit your records first. It is vital to make sure you submit a timely tax estimate and revised tax estimate. You will not fall too far off from your tax estimate and, therefore no issue with a tax refund. 

Luxury and cash purchases. Frequent changes in car and property purchases do trigger a tax audit. Especially if it involves a massive amount of cash, it is also a common trigger for a tax audit. 

Be prepared. If you are chosen for an audit, you should immediately prepare yourself. Review your tax return and associated records. Don’t hesitate to get expert advice if you need it; a tax agent can provide valuable insight and information specific to your circumstances.

There are too many scams nowadays. It is essential to verify first. If you received a request for a tax audit, make sure you verify it is true. Make sure the request came in by mail or email from the official email address. You can always confirm them by calling the respective IRB branches. 

During the Audit

Do not volunteer more records than the auditor requests at the audit time. Additional documents will never help you; it allows the auditor to find something wrong.

Tax auditors can only request information and records related to the official request you received in the audit notification. If they stray from that, don’t be afraid to politely tell them ‘no’. They have the option of filing a second official request, but many won’t bother and will simply let it go.

While the odds of being audited are generally relatively small, it is unlikely that you’ll exit an audit without paying some additional tax or penalty. The IRB wants to generate as much income as possible, and the officers do have a KPI target to meet.

However, having the proper documentation for every item on your return lessens the probability that you’ll have to pay. So regardless of which item the IRB officer is questioning, you have the paperwork to back up what you claimed on the return.

Provided you haven’t intentionally done anything wrong, there is usually nothing significant to worry about. Again, do consult a tax agent for consultation. 

author avatar
Tan Lee Ling
Tax Consultant by training in the Big Four and trained several years with Dr Choong. Being a Chartered Accountant with a law degree. Specialised in compliance, tax planning and tax investigation in her early years. Being in tax for 12 years, to her Tax is like a tree, it is the life force for the country, tax is dynamic, continuously changing and growing. Lee Ling is the conduit in charge of not just sharing these tax changes, also to bring Dr Choong's brilliant tax planning to the tax professionals and business community.
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