How IRB detect individual taxpayer’s under-reported income?

Overview

On 20.12.2020, Inland Revenue Board (IRB) published an article “Should Capital Statement be made law in Malaysia?” in The Star Malaysia. Most of the taxpayers will come with a doubt on how IRB determine whether individual has under-reported profit or income.

Key takeaway

You will understand:

1.       What is capital statement

2.       Why capital statement so important?

3.       What we need to do?

Summary of learning

What is capital statement?

 1.       Capital statement is a statement to show the net worth of an individual.

 2.       It consists of:

-          CP102 (Pin 10/80): Statement of Personal & Private Expenses (Equivalent to Income Statement)

 -          CP103 (Pin 5/96): Statement of Net Assets (Equivalent to Balance Sheet)

 Why capital statement so important?

1.       Capital statement is a tool used by LHDN to analyse individual taxpayer’s reported tax amount, and to detect any under-reporting or evasion of income.

 2.       The basic formula is Income = Saving + Spending

-          It means each person earning should equal to their “Saving and Spending”.

-          Individual tax payer has to be aware of any surplus of saving or spending as it will expose to LHDN as signal of unreported income.

 3.       All figures in the capital statement must be supported by documentary evidence.

 4.       LHDN has the power to raise additional tax payables based on “best judgement assessment” if taxpayer:

 -          unable to explain the surplus or deficit in the capital statement.

-          fail to keep records or supporting documents.

What we need to do?

1.       To prepare a capital statement earlier to avoid any uncertainty on the movement of funds.

2.       To keep all the supporting documents / evidence on income and money spent.

3.       To prepare on a yearly basis to avoid memory loss on income earned or expenses spent.

Reference:

http://phl.hasil.gov.my/pdf/pdfam/20201220_The_Star_Should_Capital_Statement_Be_Made_Law_In_Malaysia.pdf

https://www.thestar.com.my/news/nation/2020/12/20/should-capital-statement-be-made-law-in-malaysia

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