Taxman On The Audit Run

We would like to alert clients of the recent stepped up audits by IRAS on past tax filings and relevant financial statements. Such queries are generally raised via IRAS' desk or field audits.

For desk audits, IRAS would issue tax query letters concerning past tax filings of a taxpayer, requiring a satisfactory reply within a given timeframe. For field audits, IRAS would usually give the taxpayer advance notice of its intention to conduct a field tax audit, informing the taxpayer of the proposed date of field audit and the types of records for review. Typically, IRAS gives 2 to 3 weeks' advance notice to the taxpayer to prepare for the field audit.

What has IRAS been looking out for in recent tax audits?

Based on recent tax audit cases that we handled, we observed that the emphasis of the tax audits has been on the details on claims of expenses and payments of remuneration for the purposes of determining whether the claims are excessive, fictitious or private in nature. IRAS has asked for details of expenses relating to entertainment and travel, commission payments, and remuneration, bonuses and benefits paid to directors and staff of a company. We append below the information commonly requested by IRAS in recent tax audits:

Entertainment and travel expenses

IRAS typically looks out for items that do not qualify for tax deductions such as private expenses or expenses that are not substantially incurred for the purpose of producing the income. Examples of such expenses include entertainment expenses incurred for social purposes by the staff or directors, and travel expenses incurred for spouses and family members of the directors on overseas trips.

Commission payments

IRAS' main concerns are: (i) the rightful claim of expenses for tax deduction by the payer; and (ii) the completeness of declaration of income for personal income tax purposes by the recipient. Generally, commission payments will be admitted for tax deduction if they are incurred in the production of taxable income and are not fictitious or excessive claims. IRAS is likely to use this information to cross-check whether the commission payments have been properly declared under the personal income tax forms of the recipients.

Bonuses and staff benefits, directors' fees and remuneration

IRAS' concern with bonuses and staff benefits is mainly on whether bonuses and other benefits have been brought to tax in the correct Year of Assessment. The timing of taxation is relevant because contractual bonuses are taxable based on the employment contract whereas non-contractual bonuses are taxable upon approval of the payment.

For directors' fees, remuneration and other similar payments, IRAS is also concerned with whether the amount of directors' fees, remuneration and other similar payments payable to the directors commensurate with the roles and responsibilities assumed by the directors. Any excessive payment of directors' fees, remuneration and other similar payments to directors may not be admitted for tax deduction.

What is the likely consequence of a tax audit?

If IRAS is satisfied with the claims of a taxpayer upon its audit, it is less likely for IRAS to conduct a tax audit on the same items again on the same taxpayer within the next 2 to 3 years. However, if the taxpayer is unable to furnish sufficient information/explanation to support the claim of expenses or payment of remuneration and other similar payments to its employees and directors under query, IRAS is likely to make tax adjustments to the relevant Year(s) of Assessment by disallowing the claims of expenses or bringing the omitted income to tax accordingly. For cases of non-declaration of remuneration and other similar payments to employees and directors, IRAS may further query on the omission in reporting the income item. In cases where no satisfactory explanation is provided for the omission of income or wrongful claim of expenses, IRAS may impose penalties from 100% to 200% of the amount of tax undercharged.

What can taxpayers do to prepare themselves?

Be prepared for the tax audit! Currently, the Singapore Income Tax Act ("SITA") (2004 Revised Edition) empowers the Comptroller of Income Tax to issue tax assessments for up to 6 prior years of assessment¹. Legally, a taxpayer is required to maintain his or her records for only up to 7 years² from the year of assessment to which any income relates. Keeping proper documentation and records is not only legally necessary, but has proven to be useful and helpful in providing support for tax declarations when IRAS audits taxpayers. To manage the tax audit risk, it is recommended that taxpayers seek professional help in reviewing their past tax filings to ensure proper compliance with tax laws. Seeking professional advice would help to avoid unnecessary protracted arguments with IRAS and facilitate speedy resolution of tax issues. It is also worth noting that a voluntary disclosure of a tax filing error to IRAS will usually result in a substantial reduction in the amount of penalties that may be imposed by IRAS.

We can assist you in handling audit queries raised by IRAS and advise you on how to put forth a defensible position to reach an amicable and reasonable resolution. You may contact our team of tax experts listed on the cover page.

Footnotes

1 The earliest Year of Assessment that the Comptroller can issue an assessment for in the calendar year 2007 is the Year of Assessment 2001 under the existing law. With effect from 1 January 2008, the Comptroller of Income Tax can only issue an assessment for up to 4 prior years of assessment.

2 Example – for Year of Assessment 2007, the oldest records to be maintained are records relating to transactions for the accounting year ended in the year 2002. For Year of Assessment 2008 onwards, the record keeping period is shortened to 5 years from the year of assessment to which any income relates.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.