Can IRB raise assessments beyond time barred years?
LATELY, there has been some unhappiness with taxpayers who have been issued additional tax assessments for the time barred years. Can the Inland Revenue Board (IRB) issue such assessments and under what circumstances? Let us get an understanding of where it is possible or otherwise.
Finality to a person’s tax affairs is a basic right of every taxpayer. Tax risks cannot remain forever. Therefore, the objective of including a time bar or limitation period within the tax legislation is to ensure that taxpayers have a finality/certainty to their tax assessments.
Assessments are automatically generated when you file your annual tax returns under the self-assessment system.
Limitation period The IRB can raise assessments (including penalties) or additional assessments in that year or for the previous five years in the event there has been no assessment or insufficient assessment on all income matters other than matters pertaining to transfer pricing adjustments where the time bar period is seven years.
When can the time bar be lifted? Where it appears to the income tax directorgeneral that any form of fraud or wilful default has been committed by or behalf of any person or any person has been negligent, the time bar no longer applies and the IRB can go back as many years needed to raise assessments for making good any resultant loss of tax.
Meaning of fraud, wilful default and negligence These phrases are not defined in the tax legislation and therefore we need to resort to case laws for guidance.
Fraud and wilful default are rather similar. In both instances, they are intentional or deliberate concealment, hiding, deception, forgery or misrepresentation which is intended to gain an illegal advantage. It is knowingly made or without belief in its truth or recklessly, careless whether it is true or false or whether his act or omission is a breach of his duty.
Examples of fraud and wilful default are: deliberate omission of income or over claiming expense deductions, making false representations or statements or preparing false books of accounts – not disclosing rental or other ad hoc income such as fees earned at speaking events or even income earned from share trading if the person is regularly buying and selling shares as part of his day-to-day business activity, etc.
Negligence occurs when a taxpayer fails to exercise the degree of care that an ordinary man in the same circumstances would have exercised or negligence can be defined as omitting to do something that a reasonable man would do, or doing something a reasonable man would not do
Does this mean that every omission will be regarded a negligent act and therefore allowing the time bar to be lifted? These tax provisions have to be judiciously applied and therefore in the first instance, the burden of proof lies on the shoulders of the IRB to show that there has been a fraud, wilful default or negligence on the part of the taxpayer.
As long as the taxpayer can prove that he has been transparent, cooperative and taken proper steps to comply with the law and taken advice where needed and acted in the way to satisfy the test of what an “ordinary man would have done”, he should be able to defend himself against any challenges by the IRB.
Can the IRB issue assessments for all tax years from the commencement of the audit or investigation? The simple answer is negative. Unless there is fraud, wilful default or negligence involved.
Please be reminded these are not clear cut issues and therefore your innocence on tax matters can only be defended if you had taken all steps deemed reasonably prudent, and merely pleading ignorance of the law will not be of any help.
The writer is the managing director of Crowe Horwath Tax Sdn Bhd and a trustee of the Malaysian Tax Research Foundation.