The Inland Revenue Board of Malaysia (IRBM) has released a new Tax Audit Framework on Income Tax and Employer on 15 March 2025.
The updated framework replaces several previous audit frameworks, including:
- Tax Audit Framework (2022);
- Tax Audit Framework for Petroleum (2022);
- Tax Audit Framework on Finance and Insurance (2022);
- Audit Framework for Employer (2021); and
- Tax Audit Framework on Withholding Tax (2015).
The updated audit framework will take effect on 15 March 2025.
IRBM tax audits cover income tax, capital gains tax, withholding tax, Labuan business activities tax, and employer compliance.
IRBM uses two main audit methods:
- General Review — a desk audit conducted at IRBM offices, often involving correspondence on income adjustments, employer compliance, and Labuan business activities; and
- Comprehensive Review — a deeper audit that may include site visits to the taxpayer’s or employer’s premises and examines business records, contracts, withholding tax, incentive compliance, and employment documents;
The audit look-back period is up to three years for income tax, withholding tax, and Labuan tax, and two years for employer audits. However, in cases of fraud or negligence, the audit look-back period can be extended to five years (income tax, withholding tax, Labuan tax) or 12 years (employer offences).
Audit cases are selected based on computer analysis, tax risk criteria, and information from various sources, including third parties and industry issues.
The audit process includes requesting documents or issuing a notice for reviews, conducting visits for comprehensive audits, reviewing records/assets, communicating findings, and resolving issues.
For comprehensive reviews with site visits, a compliance notification letter will be sent at least 14 days in advance. It will include the visit date, required records, tax/remuneration years under audit, the audit officer’s name, and visit duration. Taxpayers/employers may request a postponement for valid reasons.
Taxpayers and employers must keep complete records to determine income, losses, and employer obligations. Audit officers have full access to these records, including electronic data.
Taxpayers will receive a case review letter detailing the audit issues and rationale, with 18 calendar days to provide feedback and explanations.
If no objection to a finding letter is received, the taxpayer is considered to agree, and a notice of assessment will be issued.
Target resolution times for audits range from 90 to 450 days, depending on business complexity, and may be extended if needed.
Penalties under various tax acts include 15% for a first offence, 30% for a second, 45% for third and subsequent offences, 0% for technical adjustments, and 100% for willful default or fraud;
Taxpayers or employers can voluntarily disclose underreported income or non-compliance before an audit begins, reducing penalties to 10% if disclosed within six months of the return or 15% otherwise.
Tax and penalty payments from audits are due within 30 days of the assessment notice, and if approved, instalment options are available.
Taxpayers who are discontented with the assessment can appeal to the Special Commissioners of Income Tax within 30 days.
