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An overview of offences for non-filing, incorrect declaration and wilful evasion of tax.
1. Introduction
Certain Taxpayers may be tempted to under-declare their income, believing that they can escape the scrutiny of tax authorities. Some taxpayers may believe that if they declare their main source of income, the Inland Revenue will not look into their other income sources. Some may not declare their income all together.
However, not declaring or incorrectly declaring your income are criminal offences under the Income Tax Act 1967 (ITA) and potentially the Anti-Money Laundering, Anti-Terrorism Financing And Proceeds Of Unlawful Activities Act 2001 ("AMLA Act") which could lead to severe consequences, including criminal charges.
In practice however, the Revenue are empowered (in certain circumstances) to pursue a civil action with the imposition of penalties in lieu of a criminal prosecution. Nevertheless, this is still a penal action in nature.
Directors can also be held liable for the failures of their companies to correctly declare their income.
2. Topics Covered
In this article we will delve into:
A. The criminal offences and penalties associated with:
Failing to file a tax return
Incorrect declaration of income
Willful evasion
B. Penalties that may be imposed in lieu of a criminal prosecution in select cases
C. The liability of Directors for the tax offences of their companies
C. The money laundering implications of tax offences
D. Case examples
3. Offences and Penalties
A. Failing to File a Tax Return (Section 112 ITA)
Offence
Where a taxpayer fails to file a tax return without reasonable excuse, it is a criminal offence under Section 112 ITA. A criminal conviction can carry the below penalties:
The Criminal Penalty on Conviction
Imprisonment: Up to 6 months
Fines: RM 200 – RM 20,000
RM 1000- RM 20,000 (if failure is for more than 2 years)
Tax: Repayment of unpaid tax
Penalty: Up to 3X unpaid tax (if failure is for more than 2 years)
Civil Action in Lieu of Criminal Prosecution
Tax: Repayment of unpaid tax
Penalty: Penalty of up to 3X unpaid tax
B. Incorrect Returns (Section 113 ITA)
Offence
Where a person:
a) makes an incorrect return or understates their income; or
b) gives incorrect information relating to their tax chargeability
the same is a criminal offence under Section 113 ITA if not done in good faith and a conviction can carry the below penalties:
The Criminal Penalty on Conviction
Fines: RM 1,000 – RM 10,000
Tax: Repayment of undercharged tax
Penalty: Penalty of up to 2X undercharged tax
Civil Action in Lieu of Criminal Prosecution
Tax: Repayment of undercharged tax
Penalty: Penalty of up to amount of undercharged tax
C. Wilful Evasion (Section 114 ITA)
Offence
Where a person willfully and with intent to evade or assist any other person to evade tax
a) omits from a return made under the ITA any income which should be included;
b) makes a false statement or entry in a return made under the ITA;
c) gives a false answer (orally or in writing) to a question asked or request for information made in pursuance of the ITA;
d) prepares or maintains or authorises the preparation or maintenance of false books of account or other false records;
e) falsifies or authorises the falsification of books of account or other records; or
f) makes use or authorises the use of any fraud, art or contrivance
the same is a criminal offence under Section 114 ITA if not done in good faith and a conviction can carry the below penalties:
The Criminal Penalty on Conviction
Imprisonment: Up to 3 years Fines: RM 1,000 – RM 20,000
Tax: Repayment of undercharged tax
Penalty: Penalty of up to 3X undercharged tax
4. Liability of Directors
Pursuant to Section 75A of the ITA, Directors of companies can be held jointly and severally liable for the unpaid or due taxes due by the company.
For these purposes, a "Director" is a person occupying the position of a director (by whatever name called) and who on their own or through their associates own at least 20% of the ordinary shares of the Company.
There are numerous cases in which the Revenue have pursued action against directors of companies for the failures of the company to declare or correctly state their taxes.
5. Scheduled Money Laundering Offences
It is important to note that the above offences (under Sections 112, 113 and 114 of the ITA) are also scheduled as “serious offences” under the Second Schedule to the AMLA Act.
The importance of this cannot be overstated. Corporations and individuals that do no challenge tax assessments issued pursuant to the above sections or admit liability to the same (on the assumption that they’re willing to pay to make the matter “go away”), may be inadvertently admitting guilt to the commission of a money laundering offence! For listed companies, this could further have major repercussions on their reporting requirements.
The Criminal Penalty on Conviction
Imprisonment: Up to 15 years Fines: 5 times the value of the proceeds of unlawful activity OR RM 5,000,000 (whichever is higher)
6. Examples of Criminal Tax Cases
Whilst the Inland Revenue are more likely to pursue a civil action for the recovery of taxes in lieu of a criminal action, that does not mean taxpayers are safe from criminal prosecution.
In recent times, there have been more criminal prosecutions under the ITA and AMLA Act against taxpayers who allegedly fail to declare or incorrectly declare their income:
YEAR | CASE DETAILS |
2023 | A company Director was charged in the Batu Pahat Magistrate’s Court for the criminal offence of his company allegedly evading income tax of more than RM 500,000. |
2021 | A company and a number of its subsidiaries had 44 of their bank accounts frozen (including that of their Directors and Directors’ spouses) under the AMLA Act on the alleged basis that there was an incorrect declaration of tax by the company . The company was unable to pay its creditors and staff due to the freezing orders and the Inland Revenue demanded close to RM 10,000,000 in payment to lift the freezing orders. Judicial Review proceedings were instituted in the matter. |
2018 | The wife of a former prime minister was charged with 17 counts of money laundering and 5 counts of failing to declare income tax involving RM 7,097,750. The trial is the matter is currently ongoing. |
2018 | A lawyer was charged with money laundering offences and for allegedly making incorrect declarations to the Inland Revenue. The lawyer was in 2022 acquitted of all charges. |
6. Conclusion
The Inland Revenue Board employs advanced data analysis techniques and audits to identify tax evasion and under-declaration of income. In the digital age, it has become easier for Revenue to detect unreported income, as financial transactions leave digital footprints that tax authorities can trace. Cross-referencing data from various sources, such as banks, employers, and business records, allows tax authorities to spot inconsistencies.
Failure to declare income or incorrectly declaring income can have severe repercussions including criminal prosecutions. Taxpayers ought to be aware of their rights and avoid unknowingly admitting guilt to a criminal offence.
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