Penalties for Errors in Tax Returns
Under the Income Tax Act, taxpayers may face the following consequences depending on whether there is evidence indicating intention to evade taxes:
Without intention to evade taxes
- Penalty up to 200% of the amount of tax undercharged;
- Fine up to $5,000; and/or
- Imprisonment up to three years
With intention to evade taxes
- Penalty up to 400% of the amount of tax undercharged;
- Fine up to $50,000; and/or
- Imprisonment up to five years
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 his tax agents informing him 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. Whether the taxpayer is committed 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 person to prepare their accounts, etc.
Voluntary Disclosure of Errors for Reduced Penalties
To encourage voluntary disclosures of past errors and omissions, IRAS may reduce penalties for voluntary disclosures which meet the qualifying conditions under IRAS' Voluntary Disclosure Programme. Learn more about how to make a voluntary disclosure.
For Income Tax, penalty waiver is granted for voluntary disclosures made within a 'grace period' of one year from the statutory filing date. After the lapse of the 'grace period', IRAS will impose a reduced penalty of 5% for every back year the disclosure was untimely, on an incremental basis.
Example 1: Rental Omission in YA 2019
Taxpayer omitted to declare rental income received in 2018. He voluntarily disclosed the omission to IRAS on 1 Apr 2020. Assuming he has met all the qualifying conditions under the Voluntary Disclosure Program, the penalty treatment is as follows:
- Since taxpayer came forward during the grace period of 16 Apr 2019 to 15 Apr 2020, IRAS will grant a one-time waiver of penalty.
- If taxpayer makes the disclosure after 15 Apr 2020 but before 16 Apr 2021, the penalty would be 5% of the tax undercharged.
Example 2: Rental Omission in YA 2017
Taxpayer omitted to declare rental income received in 2016. He voluntarily disclosed the omission to IRAS on 1 Apr 2020. Assuming he has met all the qualifying conditions under the Voluntary Disclosure Program, the penalty treatment is as follows:
|16 Apr 17 to 15 Apr 18||16 Apr 18 to 15 Apr 19||16 Apr 19 to 15 Apr 20|
|Grace period 0%||5%||10%|
If the taxpayer makes the disclosure after 15 Apr 2020 but before 16 Apr 2021, the penalty would be 15% of the tax undercharged.