Tax Audit Framework for Income Tax and Employer

The Inland Revenue Board of Malaysia ("IRB") issued the Tax Audit Framework for Income Tax and Employer (“2025 Framework”), effective from 15 March 2025.

This new framework supersedes and consolidates the following previous audit frameworks:

Tax Audit Framework dated 1 May 2022
Tax Audit Framework on Finance and Insurance dated 1 May 2022
Tax Audit Framework for Petroleum Tax dated 1 May 2022
Tax Audit Framework for Employer dated 1 October 2021
Tax Audit Framework on Withholding Tax dated 1 August 2015

Scope of Audit

The scope of tax audits under the 2025 Framework has been broadened to include:

Review of Capital Gains Tax (CGT) on disposals of unlisted shares, and the expenses claimed in the computation of capital gains;
Assessment based on the substance-over-form principle;
Examination of eligibility and compliance with conditions relating to approved tax incentive claims;
Verification of economic substance requirements for Labuan business activities, assessing their continued eligibility under the Labuan Business Activity Tax Act 1990 (LBATA).

Audit Coverage Period

Audit Activity	Coverage	Time Limit	Time Limit not applicable
Income Tax & Petroleum Tax	Up to 3 YAs	Up to 5 YAs	Audit cases involving fraud, wilful default or negligence
Withholding Tax	Up to 3 YAs	Up to 5 YAs	Audit cases involving fraud, wilful default or negligence
Employer	Up to 2 Years of Remuneration	Offences under 83 of ITA, up to 12 yeaers from the year the offence occurred	Audit cases involving fraud, wilful default or negligence
Labuan	Up to 3 YAs	Up to 5 YAs	Audit cases involving fraud, wilful default or negligence

Audit Settlement Period

The commencement of the audit settlement period depends on the review method employed:

Review Method		Starting Date
General Review		Date of the Letter Requesting Documents and Information issued to the taxpayer / employer
Comprehensive Review	Taxpayer’s / employer’s premises or any other agreed location	Date of the Audit Visit
	IRB Office (in-person/virtual)	Date of Determination of Commencement of Case Settlement Period Letter

Audit Completion Timeframe

Type of Audit	Business Activity	Completion Timeframe (calender days)
Employer Audit	N/A	90
Withholding Tax Audit	Payer	90
Withholding Tax Audit	Payee	180
Finance & Insurance Industry Audit	Financial leasing, factoring, credit card services, stockbrokers, share and bond brokers, financial market operations and services / other financial intermediaries	90
	Brokers, agents and adjusters (insurance and takaful including re- insurance and re-takaful)	90
	Commercial banks, investment banks, Islamic banks and other financial institutions	240
	Insurance and takaful including re- insurance and re-takaful	240
Petroleum Audit	Exploration	240
Petroleum Audit	Production	450

The above timelines do not apply to cases requiring further verification from external parties. Once an audit is completed, the same YA and issue will not be re-audited unless new issues or information arise.

Voluntary Disclosures (“VD”)

Key provisions regarding voluntary disclosures under the 2025 Framework are:

1. Applications must be submitted to the State Operations Director or Division Director.

2. The following documents must accompany a VD application:

Copy of the income tax return form (“ITRF”);
Audited financial statements;
Details of applicable tax incentives and associated conditions;
Original and revised tax computations;
Detailed information supporting the VD, including ledgers and documents related to additional income;
Any other relevant supporting documentation.

3. Disclosures lacking valid justification or supporting documentation will be rejected.

4. Incomplete disclosures will prompt further information requests or may trigger an audit.

Penalties

The applicable penalties and rates remains unchanged. The penalties under the 2025 Framework for incorrect return are as follows:

Audit Activity	Offence	Penalty Rate
Income Tax, Petroleum Tax, Capital Gains Tax	First offence	15 %
	Second offence	30 %
	Third and subsequent offences	45 %
	Technical adjustment	0 %

However, other specific penalties will be charged on the following offences:

Audit Activity	Type of Offence	Timeframe	Penalty Rate
Income Tax, Petroleum Tax, Capital Gains Tax	Voluntary disclosure before audit commences	Within 6 months from ITRF submission deadline (submitted first amended tax return form before the additional voluntary disclosure letter)	10 %
Income Tax, Petroleum Tax, Capital Gains Tax	Voluntary disclosure before audit commences	After ITRF submission deadline	15 %
Withholding Tax	Failure / underpayment / late remittance	Tax Increase	10 %
Withholding Tax	Failure / underpayment / late remittance	Penalty under subsection 113(2) for claiming expenses under Section 39 of the ITA	According to the number of offences

Effective from 1 January 2025, any offences under Labuan may be subject to following fines and penalties:

Description of Offence	Penalty
Failure to submit correct details as required by the Director General under Paragraph 5(3)(b) or 10(3)(b) of the LBATA	A fine of not less than RM20,000 and not exceeding RM1,000,000, or imprisonment for a term not exceeding 2 years, or both
Failure to comply notice issued under Section 22B, 22C, or subsection 22D(5) of the LBATA	Offence may be compounded under Section 24 of LBATA, a sum of money not exceeding 50 % of the maximum fine amount (RM500,000), except for penalties imposed upon conviction
Violation of Section 22EB of the LBATA	Offence may be compounded under Section 24 of LBATA, a sum of money not exceeding 50 % of the maximum fine amount (RM500,000), except for penalties imposed upon conviction
Failure to submit return of profits	A fine of not less than RM20,000 and not exceeding RM1,000,000, or imprisonment for a term not exceeding 3 years, or both Offence may be compounded under Section 24 of the LBATA, up a sum of money not exceeding 50% of the maximum fine amount (500,000), except for penalties imposed upon conviction.
Create incorrect return of profits and information	A fine of not less than RM20,000 and not exceeding RM1,000,000, or imprisonment for a term not exceeding 3 years, or both Offence may be compounded under Section 24 of the LBATA, up a sum of money not exceeding 50% of the maximum fine amount (500,000), except for penalties imposed upon conviction.

For employer audit cases, any offence discovered during the audit will be subject to fines and penalties as follows:

Description of Offence	Penalty
Failure to comply with subrule 10(1) or Rule 13 of Income Tax Rules	Fine of not less than RM200 and not exceeding RM20,000 or imprisonment for a term not more than 6 months or both. The offence may be compounded under Section 124 of the ITA. For repeated offences, the total number of offences will be considered in determining the compoundable amount.
Failure to submit return under subsection 83(1) of the ITA or returns under subsections 83(1A) or 83A(1) of the ITA
Failure to submit Form CP22, CP22A / CP22B, and CP21 under subsections 83(2), (3), or (4) of the ITA
Failure to comply with directives under subsection 83(5) and Section 107 of the ITA