Penalties for Errors in Tax Returns
IRAS audits tax returns and imposes penalties when there are errors, omissions and discrepancies.
Under the Income Tax Act 1947, taxpayers may face the following consequences depending on whether there is evidence indicating intention to evade taxes:
Without intention to evade taxes
- Penalty of up to 200% of the amount of tax undercharged;
- Fine of up to $5,000; and/ or
- Imprisonment of up to three years
With intention to evade taxes
- Penalty of up to 400% of the amount of tax undercharged;
- Fine of up to $50,000; and/ or
- Imprisonment of up to five years
You may make a Voluntary Disclosure of errors/ omissions/ discrepancies to reduce the penalties imposed under the IRAS' Voluntary Disclosure Programme.
IRAS will notify taxpayers of the penalty amount and due date for payment of penalty. IRAS will also explain the reason for imposing the penalty.
Consideration of "Individual Circumstances"
For cases where there is no evidence of any intention to evade taxes, IRAS will decide on the penalties for errors in tax returns by considering if taxpayers have been compliant with their tax responsibilities, or if they have committed errors with negligence and/ or without reasonable excuse.
Individual Circumstance #1: Negligence/ "Without Reasonable Excuse"
Possible indicators of negligent behaviour include:
- Taxpayer has committed an offence on the same issue or a similar issue;
- Taxpayer has received prior information from IRAS or advice from its tax agents informing it of the correct tax treatment;
- Taxpayer has good knowledge of tax laws (e.g. taxpayer is a tax agent/ accountant) but submits an incorrect tax declaration; or
- Taxpayer does not keep proper records and accounts of its business transactions
Individual Circumstance #2: Compliance History
Bad compliance history is an aggravating factor when IRAS decides on the penalty for the tax offences. A taxpayer is considered to have a bad compliance history if the taxpayer has two bad compliance records within two years before the completion of the audit.
Bad compliance records include:
- late payment of taxes due;
- late filing of Estimated Chargeable Income (ECI);
- late filing of tax return; and
- previous omission of income, giving of incorrect information or wrongful claim of relief/ expense.
Individual Circumstance #3: Cooperation During Audits
Being uncooperative during an audit is an aggravating factor that IRAS will take into consideration when deciding on the penalty for the tax offences. A taxpayer is considered to be uncooperative during audit when:
- Taxpayer does not respond to audit queries in a timely manner and has no reasonable excuse for the delayed response; or
- Taxpayer delays the progress of the audit with no reasonable excuse or obstructs the progress of the audit.
Individual Circumstance #4: Commitment to Future Compliance
IRAS operates on the belief that taxpayers are generally compliant. Taxpayers' commitment to improving their tax compliance going forward is a mitigating factor that when IRAS will take into consideration when deciding on the penalty for the tax offences.
Taxpayers can show their commitment to better tax compliance in the future by undertaking to improve their record keeping, using proper accounting software and/ or engaging suitably qualified persons to prepare their accounts, etc.