Issue 2, Feb. 2014 - How to react to the protective assessment for the year of assessment 2007/08

As there is a 6 year time limit in Hong Kong for raising back year assessments under section 60 of the Inland Revenue Ordinance (“the Ordinance”) to protect tax revenue, it is often necessary for the Assessor of the Field Audit and Investigation Unit (“FAI Officers”) of the Inland Revenue Department (“IRD”) to raise estimated assessment for yet to complete cases.  The deadline for raising estimated assessments for the year of assessment 2007/08 (“2007/08 EA”) is 31 March 2014. 

If a taxpayer receives a 2007/08 EA and notes that his/her file number is longer than the usual one with an extension like 4XD-XDDDDDDXXXDD (X=character, D=number), it means that he/she becomes the tax audit target despite no advance notification is received from the FAI Officers.  

Although being a tax audit target will in no event be regarded as a pleasant experience to taxpayers, they should stay calm and are recommended to take the following actions immediately:

• Review available records to ascertain if any income was omitted or expenses were over claimed when filing tax return for the year of assessment 2007/08 
• Ascertain whether proper records/documentary evidences are kept in order to substantiate the information filled in the tax return
• Quantify the tax exposure in case irregularity is revealed
• Lodge objection in writing within one month after the date of the issue of the 2007/08 EA in case the tax demanded is larger than the tax exposure quantified
• Consider lodging a claim under section 70A of the Ordinance on/before 31 March 2014 if, in the course of the aforesaid review, any error or omission in the tax return or statement submitted or any arithmetical error or omission in the calculation of income/profit assessed or tax charged suggests that tax previously charged for the year of assessment 2007/08 is excessive

Receipt of 2007/08 EA is merely the beginning of a tax audit if taxpayers have never been notified by the FAI Officers that a tax audit is being conducted on their tax affairs. 

An invitation from the FAI Officers for conducting an initial interview either at the business premises of the taxpayer or at the IRD office will follow. 

In order to protect their rights and interests, taxpayers who are facing tax audit are highly recommended to seek professional advice as soon as possible so as to formulate a proper approach to deal with the tax audit.