Tax audits would be conducted a few years later after the tax returns are submitted. The taxpayers are required, under the Income Tax Act 1967, to keep all relevant documents and information for seven years. However, many SMEs always overlook this and usually leave it to the accounting staff to manage. It is always the case that if the accounting staff leaves the company and a new one takes over, the documents can’t be located.
If tax audits raise any enquiries on expenses with IRB officers requiring supporting documents and the taxpayer fails to provide them, the risk is that IRB may adjust the tax assessment by disallowing as deduction while imposing penalties. Moreover, failing to keep documents is an offence under the Act and the company directors are liable for punishment.
2. Cash Transactions Not Reported
Many taxpayers think that income received in cash, if not reported as such in the books, the IRB will not find out. This may create some implications, for e.g. if the unreported cash income is used to pay some expenses, in the accounts it must contain the source of the cash for the payment, usually if the source is unknown it is common that it will be entered into the accounts as “advanced from director”. When this accounts’ amount keeps on accumulating year by year, it will reach a huge amount that directors are unable to explain from where they got the money to advance to the company. If the explanation is unsatisfactory for IRB, they will treat it as unreported income.
Other than that, IRB may use the method of “mean test” to find out the unreported cash income. Mean test is using the total net assets’ value plus the living expenses to be assessed against the income and capital gain of a taxpayer. If the discrepancy is huge and lacks supporting documents with explanation, the discrepancy will be treated as unreported income.
3. Bank Accounts Are Not Separate for Business Transactions
This has happened to many sole-proprietors and self-employed where they use their personal bank accounts to do business, mixing it up with private transactions in their bank accounts. If the recordings are not done, it is difficult for the tax agent or accountant to segregate the transactions to prepare accounts for the business. It may result in some incomes being missed out in reporting.
4. Do Not Have Book Keeping Practices
For tax purposes, business expenses fulfilling the requirement of the Income Tax Act 1967 are allowable for deduction. But there are certain kinds expense where not only having the expense invoices are good enough, the purposes of these expenses incurred for tax deduction purposes has to be made clear. For example, entertainment expenses, other than obtaining the invoice from the restaurant, it must be clear that the entertainment is provided to customers or staff etc. which has tax implication. For commissions paid out, the recipient’s particulars and the commissions paid for any project or purposes must be related wholly to the business.
All these need additional recordings. Only then the accountants can have full information to prepare the accounts, and the tax computed will more accurately reflect the actual position.
5. Mentality Not Changed
There are a number of attitudes many taxpayers never changed.
a. Last minute attitude. Many taxpayers only rush to their tax agent to do their tax when the submission due date is close. When time is limited they may have problems such as the tax agent needing to clarify some queries with taxpayers. There may not be enough time to wait for answers. Moreover, work done in a hurry and under stressful circumstances, results in human errors.
b. Another common mentality is that many taxpayers are prone to listening to friends or relatives’ and be easily influenced by them rather than listening to their tax agents. Their friends may simply say that they have never declared tax and they are not having any problems, or they just simply declare some income here and there instead of the actual amount and just pay little tax as a result IRB will not come to audit, etc.
All these kinds of advice results in none cooperation with tax agents.
6. Wrong Conception of Business Expenses Vs Private Expenses and Revenue Expenses Vs Capital Expenditures
It is not all accounting expenses that are tax deductible, to qualify for tax deduction. The expenses must be wholly and exclusively incurred in producing the income and that expenses are not specifically disallowed for tax deduction under the Income Tax Act 1967.
Other than that, the expenses must not be capital in nature which is incurred bringing long term benefits to the business. Only then it can be tax deductible.
All these involve technical understanding which creates arguments and disagreements among taxpayers when the tax agent presenting the computation and explanation during tax submission.
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Edited by: 浪子
Bibliography
Cheng & Co. (2018). Top 6 Most Common Accounting and Tax Problems That Can Be Avoided. Retrieved from http://chengco.com.my/wp/2018/03/20/top-6-common-accounting-tax-problems-can-avoided/
Top 6 Most Common Accounting and Tax Problems That Can Be Avoided
Reviewed by 浪子
on
December 14, 2018
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Reviewed by 浪子
on
December 14, 2018
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