Understanding Tax Audit by LHDN: What you need to know

Introduction

In Malaysia, the tax audit process conducted by Inland Revenue Board of Malaysia (IRBM) plays a vital role in ensuring the integrity of the Self-Assessment System (SAS). The goal is to promote voluntary tax compliance, educate taxpayers and prevent tax leakage through proper enforcement of tax laws.

The recently updated Tax Audit Framework on Income Tax and Employer, effective 15 March 2025, sets out a transparent and fair framework for all tax audit activities including income tax, withholding tax, capital gains tax, Labuan business activities and employer obligation.

 

What is a Tax Audit?

A tax audit is the process where LHDN reviews and verifies a taxpayer’s income, expenses, and tax declarations to ensure that correct taxes have been paid. It does not imply wrongdoing, but serves as a check to enhance compliance.

 

Objectives of Tax Audits

• Promote voluntary compliance with the Income Tax Act and related legislation
• Raise awareness and educate taxpayers and employers about their rights and obligations.
• Enforce the law to prevent revenue leakage and ensure fair taxation
• Ensure proper reporting of income and that correct taxes are paid to the government.

 

Types and Method of Audit

Types of Audits

• Income Tax Audit – Applied to individuals, companies and businesses across all industries including financial, insurance and petroleum.
• Withholding Tax Audit – Ensures taxes withheld are properly remitted.
• Capital Gains Tax Audit – Introduced in 2024, focused on share gains
• Labuan Business Audit – Verifies eligibility for special tax treatments under Labuan Tax laws.
• Employer Audit – Ensures correct PCB deductions, CP38 compliance and employee information reporting

 

Audit Methods

• Desk Audit: Document-based review done at LHDN office
• Field Audit: On-site visit within in-depth document inspection and interviews, conducted at the tax payer’s premises or other agreed locations.

 

Tax Audit Process

Understanding the tax audit process can help you prepare and respond effectively. Here’s a general overview of how a tax audit by LHDN is carried out.

1. Selection for Audit

• Cases are selected based on risk assessment, third-party data, non-compliance pattern or rando sampling
• Selection does not imply wrongdoing

 

2. Notification
   LHDN will send an official audit notice (usually by letter or email) explaining:

• Type of audit (desk or field)
• Year(s) under review
• Document required
• Audit officer’s contact details

 

3. Document Review & Request

• You must submit requested documents (e.g., tax returns, financial statements, invoices) within the stated timeline (typically 14 days).
• In field audits, officers may visit your premises to review systems and interview key personnel

 

4. Audit Execution

• Officers evaluate the information and compare it with your tax filings
• Discrepancies, if any, are raised for explanation
• You may be asked to provide clarification or additional documents

 

5. Audit Findings

• LHDN will issue a Preliminary Audit Findings Letter (Surat Penemuan Awal) outlining issues found.
• You have 18 calendar days to object or provide further clarification

 

6. Finalization & Assessment
   After considering your response, LHDN may issue:

• Additional tax assessments or
• A letter of no adjustment if everything is in orderAny resulting penalties will be communicated.

7. Closure

• Once resolved, the audit is officially close.
• LHDN generally will not audit the same year again unless new information or fraud is discovered.

 

Rights and Responsibilities

Your Rights:

• Fair, respectful, and professional treatment by audit officers.
• Proper written notification before audit actions begins.
• Has the right to appoint a licensed tax agent.
• The option to use an interpreter during audit sessions if necessary.

 

Your Responsibilities

• Cooperate fully and provide complete records and accurate information.
• Respond within the specified timeframe (usually 14 days)
• Maintain proper accounting records as required by tax laws.
• Avoid offering gifts or payments to audit officers which is a serious offence.

 

Voluntary Disclosure

You can make a voluntary disclosure if you realize your’ve underreported income as long as no audit has started

Key requirements:

• Submit a written disclosure with supporting documents
• Provide full and hones details on underreported items.

 

Penalty reductions:

• 10% if disclosed within 6 months of the due date.
• 15% if disclosed after 6 months, before audit notice is issued.

 

Disclosures made after audit action has started (e.g. after receiving a document request) are not eligible for this reduced penalty.

Penalties for Non-Compliance

Offence	Penalty
1st offence	15% of underpaid tax
2nd offence	30%
3rd offence onwards	45%
Fraud / Willful default	100%
Technical adjustment (no fault)	0%

 

For employers:

• Failure to remit PCB or comply with tax obligations may results in fines up to RM20,000 or imprisonment.

 

Frequently Asked Questions (FAQ)

1. Why was I selected for a tax audit?
   Selection is based on risk profiling, third-party data, and compliance history. It doesn’t mean you’re at fault.

 

2. How will I be notified?
   You will receive an official letter or email requesting documents or announcing an audit visit.

 

3. What should I prepare?
   Prepare tax filings, payroll record, financial statements, bank records and any related agreements.

 

4. Can I delay the audit date?
   Yes, with reasonable cause and subject to approval by LHDN.

 

5. What if I disagree with the audit findings?
   You may submit a written objection with supporting documents within 18 calendar days.

 

6. How long does an audit take?
   Most field audits last 1-3 days, but full resolution may take up to 90 days or more depending on case complexity.

 

7. Can I be audited again?
   Not for the same year and issue, unless new evidence or fraud is discovered.

 

Conclusion

A tax audit is part of ensuring fairness in the tax system-not a punishment. It’s important to know your rights and be well-prepared. Early voluntary disclosure and good recordkeeping can protect you from serious penalties. Wheen in doubt, consult a licensed tax agent or reach out to LHDN for guidance.