Introduction: De-mystifying the Audit Process
For many business owners in Singapore, receiving a notification from the Inland Revenue Authority of Singapore (IRAS) regarding an audit can be a source of anxiety. However, an audit is not necessarily an indication of wrongdoing. It is a routine part of IRAS’s mission to ensure a fair and efficient tax system.
As Singapore continues its Smart Nation journey, IRAS has increasingly leveraged data analytics and AI to identify discrepancies. In this environment, transparency and meticulous record-keeping are your best defences. Understanding what an audit entails and how to prepare for one can turn a potentially stressful event into a routine compliance check.
This guide provides a clear roadmap of the IRAS audit process, the common areas of focus, and practical tips to ensure your business remains in good standing.
Key Takeaways
- Not Always Punitive: Tax audits can be random or triggered by specific risk indicators and are a standard part of tax administration.
- Types of Audits: Audits range from Desk Audits (clarifications requested by letter) to Field Audits involving on-site visits.
- Common Triggers: Large income fluctuations, unusually high Input Tax claims, or discrepancies against industry benchmarks often prompt reviews.
- The 5-Year Record Rule: Businesses must retain all accounting and transaction records for at least five years to comply with IRAS requirements.
- Voluntary Disclosure: Declaring errors before an audit begins can significantly reduce or even waive penalties.
- Importance of Digital Trails: Using a modern payment platform helps keep revenue data accurate, reconciled, and audit-ready.
Why Does IRAS Conduct Audits?
IRAS uses a risk-based approach to select businesses for audit. Common reasons include:
- Risk Profiling: Data analytics flag businesses with unusual trends, such as a sudden drop in profit margins or a consistent “Refund” position in GST filings.
- Industry Focus: IRAS occasionally targets specific sectors known for high cash transactions or complex tax logic.
- Random Selection: To maintain the integrity of the Self-Assessment system.
- Third-Party Information: Mismatched data from suppliers, customers, or other government agencies (like the CPF Board or ACRA).
Types of IRAS Audits
1. Desk Audit
The most common type. IRAS sends a letter or email requesting clarification on specific items in your tax return.
- Process: You provide the requested documents (invoices, bank statements) via the myTax Portal.
- Goal: To resolve minor discrepancies without a physical visit.
2. Field Audit
A more intensive process where IRAS officers visit your business premises.
- Process: They may interview staff, inspect physical inventory, and review your accounting systems in real-time.
- Goal: To get a deeper understanding of your business operations and internal controls.
What IRAS Looks for During an Audit
While the scope depends on the tax type, IRAS generally focuses on the following:
GST Compliance
- Output Tax: Is the 9% GST being charged correctly on all taxable sales?
- Input Tax Claims: Are you claiming GST on “blocked items” (e.g., passenger cars or family benefits)?
- Export Evidence: For Zero-Rated supplies, do you have valid bills of lading or export permits?
Corporate Income Tax
- Revenue Recognition: Is all income accurately declared and recorded in the correct period?
- Deductibility of Expenses: Are business expenses “wholly and exclusively” incurred in the production of income?
- Related Party Transactions: Are transactions with sister companies conducted at “arm’s length”?
Employment Tax
- AIS Reporting: Is employee income (including bonuses and benefits-in-kind) correctly reported under the Auto-Inclusion Scheme?
The Audit Process: Step-by-Step
- Notification: You receive an official letter stating the scope of the audit and the years of assessment being reviewed.
- Information Gathering: You will be given a deadline (usually 14 to 21 days) to submit the requested ledgers, invoices, and bank statements.
- Interview/Clarification: IRAS may ask follow-up questions to understand how you calculate specific figures.
- Findings: IRAS will issue a letter detailing their findings. If errors are found, they will calculate the additional tax and any applicable penalties.
- Resolution: You can either accept the findings and pay the balance or provide further evidence to dispute the assessment.
Penalties and the Voluntary Disclosure Program (VDP)
Failure to comply or making incorrect returns can lead to heavy fines:
- Late Payment/Filing: Fixed penalties starting at S$200 plus percentage-based interest.
- Incorrect Returns: Penalties can range from 100% to 400% of the tax undercharged, depending on whether the error was due to negligence or wilful evasion.
The Solution: Voluntary Disclosure
If you discover an error before IRAS notifies you of an audit, you can use the Voluntary Disclosure Program. IRAS typically offers significantly reduced penalties (sometimes 0% or 10%) for businesses that come forward early to correct their mistakes.
Did You Know?
IRAS utilises AI-driven “Nudges” in the myTax Portal. During e-filing, if the system detects an amount that is significantly out of line with your previous years or industry averages, it may prompt you to “double-check” before submitting. This is designed to help businesses avoid common errors that trigger audits.
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Conclusion: Preparation is the Best Strategy
The key to a smooth IRAS audit is not found during the audit itself, but in the months and years of disciplined bookkeeping that precede it. By maintaining digital audit trails, utilising modern payment systems that automate reconciliation, and conducting regular internal reviews, you ensure that your business is always “audit-ready.” When compliance becomes a routine part of your operation, an IRAS query becomes a simple administrative task rather than a threat to your business.
Frequently Asked Questions (FAQs)
1. How long does an IRAS audit usually take?
A desk audit can be resolved in a few weeks if the documentation is clear. A complex field audit may take several months to a year, depending on the volume of transactions.
2. Can I ask for an extension to provide documents?
Yes. If the request is voluminous, you can write to the auditing officer to request a reasonable extension. IRAS is generally accommodating if the request is made early.
3. What records must I keep for the 5-year period?
You must keep all source documents, including sales invoices, receipts, credit notes, bank statements, and accounting ledgers. Digital copies are acceptable provided they are legible.
4. If I find a mistake during an audit, can I still use the VDP?
No. Once IRAS has notified you of an audit, you are no longer eligible for the Voluntary Disclosure Program for the items under review. This is why regular internal health checks are vital.
