The Inland Revenue Board conducts tax audits to verify accuracy of income declarations and tax calculations under the Self-Assessment System. The Tax Audit Framework effective 15 March 2025 establishes transparent procedures governing income tax, withholding tax, Real Property Gains Tax, and employer obligations. Between January 2024 and August 2025, LHDN collected RM16.95 billion in additional taxes and penalties through audit activities, comprising RM15.20 billion from 1,033 companies and RM1.75 billion from 321 individuals, demonstrating enhanced enforcement capabilities using data analytics and risk-based selection methodologies.
Desk audits address simpler issues through correspondence at LHDN offices, focusing on income verification, expense substantiation, and relief claims. Taxpayers receive document requests and respond within specified timeframes. Field audits involve comprehensive examination at taxpayer premises where officers review business records, interview personnel, examine accounting systems, and verify physical assets. Field audits apply when cases involve complex transactions, significant tax exposure, multiple years, or suspected non-compliance. Taxpayers receive minimum 14 days advance notice before field audit commencement.
LHDN employs risk-based selection using data analytics and third-party information. Selection factors include significant income or expenditure fluctuations, consistent losses despite ongoing operations, low profit margins relative to industry benchmarks, substantial deduction claims, discrepancies between reported income and lifestyle indicators, information from enforcement agencies, and random sampling. Companies in property development, construction, professional services, trading, and e-commerce face elevated selection probability. Transfer pricing documentation failures trigger automatic audit consideration for companies with related party transactions.
Notification arrives through Request for Documents Letter or Audit Notification Letter specifying required documents, submission deadline typically 14 days, audit scope and period, and assigned officer. Required materials include tax returns, audited financial statements, general ledgers, bank statements, invoices and receipts, employment records, and transaction agreements. Examination involves officer review of materials, interviews with personnel, income source verification, expense deductibility examination, and tax computation assessment. Officers may access computer systems during field audits. LHDN issues Preliminary Findings Letter outlining identified issues. Taxpayers have 18 calendar days to respond through written objection, supporting documentation, technical explanations, or alternative interpretations. LHDN considers responses before finalizing assessments.
LHDN issues final determination including Tax Clearance Letter when no adjustments required, Notice of Assessment for current year, or Notice of Additional Assessment when adjustments apply. Section 91 allows LHDN to raise additional assessments within five years after expiration of relevant year of assessment, extending further in fraud cases. Taxpayers must pay assessed amounts within 30 days unless objection filed.
Section 113 subsection 2 imposes penalties on understatement of tax through incorrect returns. Standard penalty equals tax undercharged, reaching treble the amount in serious cases. Section 112 addresses late filing with penalties from RM200 to RM20,000. Section 119A penalizes inadequate record-keeping with fines RM300 to RM10,000 plus imprisonment up to one year. Obstruction of audit officers constitutes criminal offense carrying imprisonment up to three years and fines up to RM10,000 plus treble the tax undercharged.
Taxpayers discovering underreported income may make voluntary disclosures before audit commencement for reduced penalties. Voluntary disclosure under Section 113 attracts 15% penalty rate compared to standard 100% penalty. Additional voluntary disclosure within six months after filing due date receives 10% penalty. Disclosures must be complete, accurate, and made in good faith. Benefits cease once LHDN commences audit through document request. Voluntary disclosure demonstrates cooperation and may preserve business reputation while achieving substantial penalty savings. Companies should maintain complete records for seven years, implement internal review procedures, and consider periodic compliance reviews to identify issues before LHDN audit commencement.
The Inland Revenue Board's Tax Audit Framework 2025 governs systematic examination of taxpayer compliance under Malaysia's Self-Assessment System. Companies selected for desk or field audits must submit comprehensive documentation within specified timeframes and respond to preliminary findings within 18 days. Understanding the audit process, penalty structures reaching treble the tax undercharged, and voluntary disclosure options enables informed responses.