Private company – tax investigation

An investment property company was subject to review by the IRD investigation team due to its unmatched expense level for the past seven years.

The IRD did obtain all water bills and electricity bills within their authority to challenge the understatement of rental income and overclaim of expenses such as traveling and entertainment.

The client hired a bookkeeping company to prepare reports to the IRD; however, the client did not give the vouchers on time and missed some. The worst was that when the IRD asked for the submission of accounting records and other documentation, the client could not provide it as they thought the bookkeeping company kept them, but the bookkeeping company insisted that they had returned to the client.

We were engaged after IRD issued the letters for two years. We used our approach to set up meetings with the IRD and listened to their concerns. Tried to assist the company in reconstructing the right accounts by obtaining and referencing the relevant bank statements and other bills to make a reasonable claim of expenses, including the traveling expenses.

In the end, we managed to agree with the IRD in one year that the understatement of profits was low and not intentional; therefore, other than the understatement of tax payable, the penalty and interest payable were acceptable to the client.

Takeaway: IRD had challenged some private entities whether they have kept proper books and records.  They want the company to prove their income level and show that the company does not understate the profit by intention (which directly affects the penalty and interest). 

To save your time, money, and energy, proper books and records should be kept. Also, a well-established system should be maintained to address the questions once raised by the IRD anytime.