The Business Owner’s Guide to Surviving Audit and Tax (In Particular, Tax Audits)
- Chow Ping
- 22 hours ago
- 5 min read
Most audits aren't triggered by wrongdoing.
Sometimes you're just... picked. Like winning the lottery. But with fewer luxury cruises afterwards.
The good news? With the right preparation and understanding, you can survive a tax audit without losing your mind (or your money).
Audit and tax: What Actually Happens During a Tax Audit
First, let's clear up a common misconception: A tax audit is NOT the same as a tax investigation.
An audit is routine. It's LHDN checking to make sure your numbers add up and you're
paying what you owe.
An investigation is what happens when they suspect tax evasion. That's when lawyers get involved and things get serious.
Two Types of Audits in Malaysia
General Review: The lighter version. Usually happens at the LHDN office, involves reviewing your income, expenses, and claims. Most of the time, this can be resolved through correspondence.
Comprehensive Review: The deep dive. Can happen at your business premises or the LHDN office. They'll inspect everything — business records, financial statements, invoices, bank statements. For sole proprietorships and partnerships, they might even look at your personal records.
From notification to resolution, a typical audit takes anywhere from 3 to 6 months.
Why Did LHDN Pick YOU?
LHDN doesn't randomly pick audit targets. They use a structured selection process based on specific criteria. (Okay, not like the lottery)
Here are the 5 things that put you on their radar:
1. Risk Assessment Scores — High-risk scores based on filing history, compliance record, and discrepancies in previous returns.
2. Third-Party Mismatches — If your reported income doesn't match what your clients reported paying you, that's a red flag.
3. Industry Red Flags — Cash-heavy businesses (F&B, retail, construction) face more scrutiny because income is harder to trace.
4. Complex Tax Structures — Transfer pricing, offshore transactions, multi-company setups trigger heightened scrutiny.
5. Geographic Patterns — Companies in certain areas may face more frequent audits if LHDN has identified patterns of non-compliance in that region.
The Audit Process Step-by-Step
Step 1: The Notification Letter — You'll receive a formal letter stating the tax years being reviewed and the documents needed (typically 30-60 days deadline).
Step 2: Document Submission — Gather audited financial statements, bank statements, invoices, receipts, payroll records, tax computation worksheets, and other relevant business documents.
Step 3: The On-Site Visit — For comprehensive audits, LHDN may visit your business premises to inspect physical records and verify inventory.
Step 4: Assessment of Findings — LHDN compares your filed returns against the evidence. If they find discrepancies, they'll issue an additional tax assessment showing the tax shortfall, proposed penalties, and interest.
Step 5: Resolution — Accept and pay, negotiate a settlement, or file a formal appeal within
30 days.
Penalties — What You're Actually Facing
Under Section 113(2) of the Income Tax Act 1967, penalties are calculated based on the underpaid tax amount and your offense history.
Here's the current penalty structure (2025 update):
First offense: 15% of the underpaid tax
Second offense: 30% of the underpaid tax
Third offense and beyond: 45% of the underpaid tax
Tax fraud (intentional evasion): 100% of the underpaid tax
How to Reduce Penalties
Voluntary disclosure BEFORE audit: 15% penalty
Voluntary disclosure WITHIN 6 months of filing deadline: 10% penalty
Technical adjustments (no evasion): 0% penalty
An example:
Let's say LHDN finds that Mr A underpaid RM50,000 in taxes.
If this is his first offense:
Underpaid tax: RM50,000
Penalty (15%): RM7,500
Interest (assume 3% per year for 2 years): RM3,000
Total amount owed: RM60,500
If this is his third offense:
Underpaid tax: RM50,000
Penalty (45%): RM22,500
Interest: RM3,000
Total amount owed: RM75,500
That's a RM15,000 difference just from repeat offenses. Get it right the first time.
Don't want to live through tax audits alone? We've got you. WhatsApp us here:
Want tips to reduce your business tax? Check out this article 12 Ways to Reduce Company Tax in Malaysia.
Are you overpaying taxes? Take our Are You Overpaying Taxes quiz to find out.
How to Survive the Audit
Before the Audit Even Starts
Keep Records Clean — LHDN can audit returns from the past 6 years. Keep all financial statements, bank records, invoices, receipts, employment records, asset purchase documents, and tax computation worksheets. Store them digitally AND physically.
Run Internal Checks — Review your past filings annually. Look for unexplained income fluctuations, missing documentation, expenses without proper support, and calculation errors. If you find issues, fix them through voluntary disclosure.
Know Your Trigger Points — Cash-heavy operations, high expense claims relative to revenue, complex corporate structures, and inconsistent year-to-year reporting all increase audit risk.
During the Audit
Stay Calm, Cooperative, and Organized — Treat LHDN officers professionally. Respond promptly to requests. Provide clear, organized documentation.
Engage a Tax Agent — A licensed tax agent knows what LHDN is looking for, can represent you officially, and negotiates penalties on your behalf. The cost (typically RM3,000-RM20,000) is usually far less than the cost of mishandling the audit yourself.
Address Issues Early — Work with LHDN to resolve issues as they arise. The earlier you address problems, the better your chances of minimizing penalties.
After the Audit
Review Findings Carefully — Check their calculations. Make sure you understand why they made each adjustment.
Appeal If You Disagree — You have 30 days from the date of assessment to file an appeal if you have legitimate grounds.
Learn From It — Use the experience to strengthen your compliance systems.
What a Tax Agent Actually Does During an Audit
They speak LHDN's language — They know which forms to file, which sections to reference, and how to frame your case.
They represent you officially — Only a licensed tax agent can sign documents and communicate with LHDN on your behalf.
They know what triggers deeper scrutiny — They'll structure your responses to minimize red flags.
They negotiate penalties — They can demonstrate good faith and negotiate reduced penalty percentages or payment plans.
One client came to us after years of poorly planned tax installments. The result? Massive overpayments that added up to RM93,000 owed back to them by LHDN.
When LHDN owes you a large refund, they don't just hand over the money. They audit your calculations first.
Without proper representation, this situation could drag on indefinitely — or worse, turn into a mess where LHDN finds other issues and the refund disappears entirely.
This is exactly why having a tax agent matters. They ensure your documentation is airtight, respond to queries correctly, and navigate the bureaucracy so you actually get what you're owed.
The Mistakes That Make Audits Worse
Hiding documents or delaying responses — LHDN will assume you're hiding something, triggering deeper scrutiny and higher penalties.
Filing incomplete or inconsistent records — If your bank statements don't match your filed income, you better have a clear explanation ready.
Not taking the audit seriously — LHDN has the legal authority to seize business assets, freeze bank accounts, and impose penalties up to 100% of underpaid taxes.
Trying to "outsmart" LHDN — They've seen every trick. Don't fabricate expenses or alter documents. A 15% penalty becomes a 100% fraud penalty.
Going into an audit without professional help — The cost of hiring a tax agent is a fraction of the cost of mishandling an audit.
You Don't Have to Do This Alone
With the right preparation, documentation, and representation, most businesses walk away from audits with minimal damage.
At Douglas Loh & Associates, we've guided businesses through countless tax audits over 32 years. We know what LHDN looks for, what triggers red flags, and how to present your case effectively.
You started a business to build something — not to become a tax expert or spend your days drowning in compliance paperwork.
Let us handle the boring, stressful parts so you can focus on what actually matters: growing your business and living your life.
Want to focus on your business while we manage the boring paperwork for you?
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