The Inland Revenue Board of Malaysia (LHDN) plays a crucial role in enforcing tax compliance across Malaysian businesses. While LHDN does not conduct financial statement audits like statutory auditors do, it carries out tax audits to ensure that companies are correctly reporting their income and paying the appropriate amount of tax.
- Difference Between Statutory and Tax Audits
A statutory audit, required by the Companies Act 2016, assesses whether a company’s financial statements provide a true and fair view. In contrast, a tax audit by LHDN specifically evaluates the accuracy of a company’s tax returns and supporting documentation.
- Why LHDN Conducts Audits
LHDN audits aim to detect underreporting of income, overstatement of expenses, and other discrepancies that may lead to tax evasion. Companies are selected for audits based on risk factors, anomalies in tax filings, or even random selection.
- Type of LHDN Tax Audits
- Desk Audit: A basic review of selected tax returns conducted at LHDN’s premises.
- Field Audit: A more comprehensive review that takes place at the company’s office, involving interviews with personnel and examination of financial records.
- Common LHDN Audit Issues
- Unsubstantiated expenses or deductions
- Misclassification of income
- Late or incomplete filings
- Discrepancies between tax filings and audited accounts
- Impact of Statutory Audits on LHDN Audits
Having audited financial statements strengthens a company’s tax position. If the statutory audit is well-executed and aligned with tax reporting, it can reduce the likelihood of triggering a tax audit. Moreover, consistency between financial and tax records demonstrates good governance and reduces the risk of penalties.
- Penalties for Non-Compliance
If discrepancies are found, LHDN may impose additional taxes, fines or penalties. In severe cases, legal action can be taken against the company or its directors.
- Preparing for LHDN Audit
Companies should maintain proper records, reconcile their financial and tax accounts regularly, and consult tax professionals to ensure full compliance. Engaging audit firms like Jamal, Amin & Partners, helps ensure that financial statements are robust, accurate and aligned with tax regulations.
In summary, while LHDN does not conduct statutory audits, its role in tax enforcement is closely linked to financial auditing practices. Companies that ensure consistent, accurate financial reporting are better positioned to pass LHDN audits with minimal disruption.