If you have ever received a notice from the Inland Revenue Board of Malaysia (LHDN), your first reaction might be panic. But according to the agency, tax audits and investigations are not meant to punish taxpayers. Instead, they are part of a wider effort to build awareness, encourage voluntary compliance, and make the tax system fairer for everyone.

A More Educational Approach To Tax Audits

LHDN’s Director of the Tax Audit Policy and Quality Division, Jema’ah Sedek, explained that the agency’s audit activities now follow the Awareness, Education and Services (AES) model.

In practice, officers may visit businesses or individuals not only to review financial records but also to guide taxpayers on proper documentation and reporting. The goal is to help taxpayers understand their responsibilities rather than penalise them unnecessarily.

“An audit does not automatically mean wrongdoing,” Jema’ah said. “If everything is declared properly, there is nothing to worry about.”

How LHDN Decides Who Gets Audited

LHDN uses a risk analysis system and data from multiple sources to decide which cases to review. These include third-party reports, public complaints, and lifestyle monitoring that compares a person’s spending habits with their declared income.

For most taxpayers, this means ensuring that their income declarations match their financial activities. When records are complete and accurate, the audit process is usually straightforward and resolved quickly.

When Investigations Go Deeper

In some situations, LHDN may open a full investigation into possible tax evasion or avoidance. These cases usually involve serious or high-risk offences, including those under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLATFPUAA).

To manage these investigations, LHDN works with several agencies, including Bank Negara Malaysia (BNM), the Malaysian Anti-Corruption Commission (MACC), and the Royal Malaysia Police (PDRM). These collaborations aim to detect suspicious financial activities and track cross-border transactions.

For most ordinary taxpayers, however, investigations of this nature are uncommon. Routine audits are far more typical and are focused on verifying that income has been reported correctly.

Your Rights During An Audit

If you are selected for an audit, you still have several rights as a taxpayer. You have the right to verify the identity of the audit officer, appoint a licensed tax agent to represent you, and review any documents that have been taken for verification.

LHDN also reminds taxpayers not to offer gifts or payments to officers, as this can create a conflict of interest or lead to legal consequences. The best approach is to cooperate fully and communicate directly with LHDN for clarification. Keeping complete and organised financial records will make the process faster and less stressful.

Non-Filing And Compliance In 2025

Tax compliance remains one of LHDN’s key priorities. The agency recently reported that 5,800 taxpayers failed to file their 2024 income tax returns through its e-Invoicing monitoring system. These taxpayers declared a combined income of RM484 million, which led to RM82 million in additional tax revenue after audits were conducted.

Overall, Malaysia’s tax compliance rate now stands above 80% among both individuals and companies. The ongoing Operation Dagang 2025 focuses on improving registration, timely submission of tax forms, and accurate income reporting across sectors such as construction, manufacturing, real estate, transportation, and agriculture.

Know Your Deadlines And Penalties

Taxpayers are required to submit their annual returns through the MyTax portal. For the 2024 assessment year, the deadline for Form BE (for employment income only) is 15 May 2025, while the deadline for Form B (for business income) is 15 July 2025.

Late submissions can result in a 10% penalty on unpaid tax, and a further 5% surcharge may apply if payment is still not made. Intentional tax evasion, false declarations, or unlawful deductions can lead to more severe penalties, including fines or imprisonment under the Income Tax Act 1967.

What This Means for You

LHDN’s updated approach to tax audits highlights a shift from strict enforcement towards guidance, education, and fairness. For taxpayers, it is a reminder that accuracy and transparency matter more than ever.

Maintaining proper records, declaring income honestly, and meeting deadlines will make the process smoother and minimise any issues if you are selected for review.

By promoting voluntary compliance and focusing on education, LHDN aims to build a more transparent and collaborative tax environment that benefits both taxpayers and the nation.

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