If you receive a letter from the Hong Kong Inland Revenue Department telling you that you and/or your business have been selected for a tax field audit or investigation section, contact our team without delay and speak to one of our tax specialists.

Please contact our team to request a no-obligation, free-of-charge discussion by phoning us during office hours on 2868 3682 and emailing us at enquiry@pkf-hk.com.

Any information given during the discussion or initial meeting will be treated in the strictest confidence.

 

1. What is a tax field audit or investigation?

A tax field audit or investigation in Hong Kong is initiated and conducted by the IRD when it detects irregularities or indications of non-compliance with Hong Kong tax laws or regulations.

There can be many reasons for tax field audits or investigations (see 2 below for a list of the factors that may trigger a tax field audit or investigation).

During a tax field audit or investigation, the IRD will ascertain the correctness of tax returns filed by taxpayers not only by examining their books of account and records, but also by visiting the taxpayers’ business premises, with a view to obtaining a thorough understanding of the taxpayers’ business operations, and thereby identifying cases where tax evasion or avoidance is involved.

A tax field audit or investigation work is normally focused on the most recent year of assessment for which a tax return has been submitted. Where appropriate and when agreed with the taxpayers, the IRD will project the discrepancies (i.e. the amounts of understated profits) for back years using different quantification methods.

Once the IRD has decided to initiate a field audit or investigation of you or your business, the most important thing is to identify the types of tax inquiries involved and how best to deal with them. Sometimes, making attempts to identify the reasons behind the tax field audit or investigation may assist in that. Unfortunately, the IRD will very often be reluctant to disclose much detail at the outset.

If you know of an irregularity in your tax affairs and you do not know how to resolve it, or you are worried that you may be investigated or find yourself the subject of a tax field audit or investigation or prosecution, then it is vital that you receive expert advice as to how best to navigate your way out of trouble.

Call PKF Hong Kong now for a confidential and free initial consultation with our tax specialists if you want to discuss your situation.  

 

2. Why am I being audited or investigated by the IRD?

Listed below are common businesses or transactions that are often on the IRD’s radar for tax field audit or investigation:-

• owners of sole proprietorship businesses;
• business transactions recorded on a cash basis;
• property owners renting out their properties for rental income;
• purchase of immovable/movable properties that involve significant amounts of cash

There can be other reasons for tax field audits/investigations, for example:-

• persistent failure to lodge, or late lodgement of, tax returns;
• incorrect or inconsistent information reports in tax returns;
• failure to keep proper business or accounting records;
• the auditors’ report in respect of the accounts of an incorporated business contains heavily qualified opinions;
• a business with an unreasonably low turnover or profit percentage when compared to others in the same or similar industry (with regard to factors such as the nature of the business, its location and type of customers);
• substantial borrowings and current accounts movements that involve owners or related parties;
• unusually large payments to overseas parties;
• conflicting information from other sources or whistle-blowers; and
• a random check.

It is crucial to identify the types of tax issues and how best to deal with them.

If you are aware of any irregularities in your tax affairs and are looking for ways to resolve them, or you are worried that you may be investigated or find yourself the subject of a tax field audit or investigation or prosecution, then it is vital that you seek expert advice as to how best navigate your way out of trouble. Therefore, we strongly recommend that you consult a tax specialist or PKF as soon as possible.

Call PKF Hong Kong now for a confidential and free initial consultation with our tax specialists if you want to discuss your situation.

 

3. How will I know if I have been selected for an IRD tax field audit or investigation?

You will normally not be notified by the IRD when they start looking into your tax affairs but if they decide to formally open a file to investigate you or your business, you or your business will receive a letter from the IRD’s Field Audit Section or Investigation Section requesting information, or informing you that they have started a tax field audit or investigation.

The process may also start with a desk audit asking for more information about the income or expenditure items reported in the latest tax return, or requesting information regarding a property transaction, etc. However, it is not uncommon for this to be turned into a tax field audit or investigation, especially in cases involving more severe tax issues.

 

4. How much additional tax will I have to pay?

The amount of tax you will have to pay depends on whether profits have been underreported or tax has been underpaid. If so, you will have to pay the outstanding tax. More often than not, the whole tax field audit or investigation process will involve numerous rounds of negotiation with the IRD, factual variations and technical tax issues.

Call PKF Hong Kong now to find out how we may assist you in discovering other issues or ways that may mitigate the tax due and the potential penalties.

 

5. Will I be subject to a penalty for the underpaid tax?

If tax has been underpaid then very often a penalty will be imposed on you in addition to the unpaid tax. Penalties can vary from as little as 5% to as much as 300% of the tax due depending on the nature and circumstances of the tax irregularity. Various factors such as the degree of culpability of the offence, the sophistication of the tax scheme involved, the length of time in which the offence was committed, and the degree of cooperation exhibited by the taxpayer are relevant. It is advisable that expert advice be sought to try and mitigate any penalty.

 

6. Will I be asked to attend an interview or meeting with the IRD?

Upon commencement of a tax field audit or investigation, the IRD will request an initial meeting or interview to gain a thorough understanding of a taxpayer’s business operations and personal affairs.

After the interview, a record of the interview will be prepared by the IRD and issued to the taxpayer for comment or confirmation. The IRD may also request the taxpayer to provide further particulars regarding his/her business and personal financial matters, together with supporting documents for inspection. Due care should therefore be exercised when reviewing the IRD’s interview notes and any documents to be submitted to the IRD - as this may have a material impact on the quantum of penalty to be imposed by the IRD.

Taxpayers who fail to produce relevant records upon request by the IRD may face a severe penalty for non-compliance. Therefore, it is recommended that taxpayers should always make an effort to review their tax filing documents and be represented by a tax specialist who will assist or accompany them at an interview.

Call PKF Hong Kong now for a confidential and free initial consultation with our tax specialists if you would like to find out the benefits of engaging a tax representative to handle your IRD tax field audit or investigation.

 

7. How far back can the IRD investigate?

How far back the IRD investigates during a tax field audit or investigation normally varies and depends on the facts of each case. Under normal circumstances, a tax field audit or investigation covers the 6 years of assessment prior to the year of assessment in which the field audit and investigation commences. However, in the case of fraud or willful evasion, the IRD may want to go as far back as 10 years to obtain information and documents.

Apart from being costly and time-consuming, depending on how far back the IRD may investigate, an IRD tax field audit or investigation can also present many practical problems for a lot of taxpayers. It is therefore important to approach a tax expert for guidance on finding solutions or reaching a settlement proposal with the IRD to avoid unpalatable estimated assessments and heavy penalties.

 

8. How much documentation will a taxpayer have to produce during a tax field audit or investigation?

A tax field audit or investigation case can involve a detailed analysis of large volumes of financial records, bank statements and other documents.

Where necessary, the IRD will examine financial records and documents to check whether they support the entries in the accounts.

The IRD generally pays special attention to the following financial records and documents: (a) sales account; (b) purchases account; (c) director’s or proprietor’s current account with the company; (d) any account with an abnormal balance; (e) any temporary account; and (f) any account with a long outstanding balance.

Sometimes, the IRD field auditors or investigators will make further checks with third parties if they have doubts about the reliability or genuineness of the taxpayer’s financial records.

 

9. Will I be punished by imprisonment for tax irregularities?

The media tends to cite examples of the most serious IRD frauds or those involving high-profile individuals. The most serious IRD frauds can result in prison sentences. However, not all prosecutions result in prison sentences. Many IRD tax investigations do not lead to criminal prosecution if handled correctly.

In general, whether a taxpayer will be prosecuted depends on the degree of accurate disclosure of any irregularities and their level of cooperation. In our experience, the key to being able to withstand the IRD’s challenge is to obtain professional representation from a tax expert who possesses the relevant experience of handling various tax investigation cases.

Contact PKF Hong Kong now for a confidential and free initial consultation with our tax specialists if you want to discuss your situation.

 

10. How long does a tax field audit or investigation normally take?

How long a tax field audit or investigation will take depends on the scope of the IRD’s field audit or investigation and the volume of paperwork involved. It could take a few months or even up to 1 year. In reality, the length of a tax field audit or investigation can be substantially extended if the IRD asks you to provide additional information. It should be noted that field audit cases that are closed within 3 months from the date of the initial interview as well as investigation cases that are closed within 6 months from the date of the initial interview are usually regarded as having fallen into the category of "Disclosure with Full Information Promptly on Challenge" of the IRD’s penalty loading policies and hence subject to a lower amount of penalty.

Depending on the nature and complexity of the case, our tax specialists can assist in reducing the amount of time required to complete the tax field audit and investigation. Contact PKF Hong Kong now for a confidential and free initial consultation with our tax specialists if you want to discuss your situation.

 

11. Will an IRD tax field audit or investigation involve other parties or even my family members?

Depending on the taxpayer’s particular circumstances, an IRD field audit or investigations could widen to include linked business partners and associates (related companies, directors, executives, employees, etc.) or even their spouses or other family members. Although this may sometimes be unavoidable, early professional advice or intervention from a tax specialist may often reduce the number of associated parties or third parties involved.

 

12. What should I do if I am under the IRD’s field audit or investigation?

If you are facing a tax field audit or investigation conducted by the IRD, or you are concerned that you may face a tax field audit or investigation in the future, contact PKF Hong Kong immediately to speak to one of our tax specialists for expert and confidential advice.

Our tax specialists will patiently listen to your situation to understand your requirements. We have successfully handled tax field audit and investigation cases for our clients in the past, and we truly believe that we can save you a lot of time in negotiating with the IRD and reduce your tax burden.

Contact PKF Hong Kong now for a confidential and free initial consultation with our tax specialists if you want to discuss your situation.