TAX AUDITING

I. Legal Framework of Tax Auditing

I.1. Powers of Tax Administration

Tax Auditing in Indonesia is governed by Article 29 of Law on the General

Provisions and Tax Procedures, which states that the Director General of Taxes is
authorized to perform audit for the purpose of assessing taxpayer’s compliance in
fulfilling tax obligation and for other purposes with respect to the implementation of
the tax laws and regulations.

The auditing for the purpose of assessing taxpayers’ compliance in fulfilling tax
obligation may be conducted in the following conditions:
a. Taxpayer files tax return declaring tax overpayment, including particular
taxpayer who has received pre-audit refund of tax overpayment.
b. Taxpayer files tax return declaring loss.
c. Taxpayer does not file tax return or taxpayer fails to file tax return on due date
stated in Letter of Reprimand.
d. Taxpayer exercises merger, acquisition, spin off, liquidation, dissolution, or
taxpayer is leaving Indonesia forever; or
e. Through a risk analysis (risk based selection) taxpayer’s return shows an
indication that tax obligations are not fulfilled.

The auditing for other purposes may be conducted with regard to implementing of
tax laws or regulations regarding the following criteria:
a. Issuing taxpayer identification number ex-officio.
b. Terminating taxpayer identification number.
c. Confirming or revoking taxable person for Value Added Tax (VAT) purposes.
d. Taxpayer files an objection letter.
e. Collecting data/information for determination of net deemed profit.
f. Verifying data and or information.
g. Determining whether taxpayer is located at remote area.
h. Designating one or more places where VAT is payable.
i. Audit in the framework of tax collection.

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j. Determining the commencement of production or extending the time period of
loss compensation relating to granting tax incentives.
k. Fulfilling information request from treaty partner country with respect to the
implementation of exchange of information of the tax treaty.

I.1.1. Right and types of auditing

Types of Auditing
The types of auditing are influenced by the level of the taxpayer non-compliance
being audited and the scope of audit. The Directorate General of Taxes carries out
2 (two) types of audit, namely office audit and field audit.
1. Office audit
Office audit is an audit held at the Directorate General of Taxes and usually is
conducted to the taxpayer whose level of non-compliance is lower.
2. Field audit
Field audit is an audit conducted at the taxpayers’ offices, business premises or
professional services, residence, or other premises determined by the Director
General of Taxes.

The obligation and authority of auditors

In conducting audit, an auditor has some obligations, among others as follows:
a. notifies a taxpayer through mail informing that the taxpayer will be audited;
b. shows auditor identity card and audit warrant to the taxpayer;
c. explains reason and purpose of conducting audit to the taxpayer;
d. shows assignment letter to the taxpayer in case audit team changes;
e. gives a notification of audit findings to the taxpayer;
f. gives a right to the taxpayer to attend a closing conference to discuss or to
evaluate audit findings in definite timeframe;
g. gives an advice and guidance to the taxpayer in fulfilling taxation obligation in
accordance with the provisions of tax laws;
h. returns books or records, documents borrowed from the taxpayer at the latest of
7 (seven) days as from the date of audit report;
i. ensures that all information obtained from the taxpayer during audit are used
only for tax purposes and will remain confidential.

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In conducting audit an auditor has the following authority:
a. looks at and or requests for books or records, documents as a basis of
bookeeping or recording, and other documents pertaining to income received,
taxpayer’s business activities, or taxable objects;
b. access or downloads data electronic;
c. enters or checks places or rooms as well as movable or immovable property
suspected or proper to be suspected to store books or records, documents as a
basis of bookeeping or recording, other documents, money and or goods that
be able to provide an indication pertaining to income received, taxpayer’s
business activities, or taxable objects;
d. requests the taxpayer to provide assistance to guarantee a trouble free audit;
e. seals certain places or rooms, and movable or immovable property;
f. requests the taxpayer to provide information verbally or in writting;
g. requests the third party who has relationship with the taxpayer to provide
necessary information and or evidence through a head of tax office.

I.1.2. On site investigation right (right to visit taxpayers premises)

A taxpayer who is selected for audit will be notified by the Directorate General of
Taxes through the mail. If an auditor carries a field audit, the auditor has the right
to visit the taxpayer’s premises. A letter confirming the visit is usually preceded by
the phone call. At the first date of visit, the auditor must show audit identity card
and audit warrant to the taxpayer and explain the reason and purpose of
conducting audit to the taxpayer.

I.1.3. Disclosure right (power in terms of investigation and collection

of information)

Request for Documents

Books, records, documents, including data electronic as well as other necessary
information obtained during audit at the taxpayers’ premises shall be borrowed
during that visit and the auditor shall make a written evidence of document request.
If the taxpayer lends copies of books, records, and documents, the taxpayer shall
make a statement that those copies are similar to the original.

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If books, records, documents, including data electronic as well as other necessary
information have not been obtained or found during the audit at the taxpayers’
premises, the auditor shall make a letter of request for the documents. The request
shall be fulfilled by the taxpayer at the latest of 1 (one) month as from the date of
the letter of request received by the taxpayer. If the taxpayer does not fulfill the
request within 1 (one) month, the auditor shall make a letter of warning at maximum
of twice.

If the period of 1 (one) month has ellapsed and the taxpayer fails to fulfill part or all
the auditor’s request, the auditor shall make a minutes or an official report
concerning taxpayer’s failure to satisfy the request. If books, records, documents,
including data electronic as well as other necessary information are confidential,
the taxpayer may propose a request that audit shall be conducted at the taxpayers’
premises.

If an individual taxpayer fails to fulfill part or all of the auditor’s request and taxable
income cannot be calculated, the auditor may then calculate taxable income ex-
officio in accordance with the provisions of tax laws and regulations. If a corporate
taxpayer fails to fulfill part or all request and taxable income cannot be calculated,
the auditor may then propose a preliminary evidence audit.

Sealing
During the process of audit, the auditor is authorized to make sealing in the
following conditions:
a. The taxpayer prevents the auditor to enter certain places or rooms as well as
movable or immovable property; and/or
b. The taxpayer fails to guarantee a trouble free audit, which among others failing
to provide the auditor to access data electronic and or open movable or
immovable property.

Third Party’s Information

The auditor through a head of Tax Office may request in writing for information or
evidence relating to audit from a third party, including information from the bank.
The third party must fulfill the request at the latest of 7 (seven) days as from the
date of the letter of request for information or evidence. If the period of time has
ellapsed and the third party fails to fulfill the request, the auditor may then make

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letter of warning I. If the third party fails to fulfill letter of warning I, the auditor may
then make letter of warning II. If the third party also fails to fulfill letter of warning II,
the auditor shall make a minutes or an official report relating to the third party’s
failure to fulfill the request.

I.2. Taxpayers’ guarantees and methods of appeals

I.2.1. The limit number of years to be audited

The scope of audit for the purpose of assessing taxpayers’ compliance in fulfilling
tax obligation may include one taxable month, several taxable months, a fraction of
taxable year, one taxable year, or several taxable years. The audit may be carried
out for one or several taxable years, or for the current year. There are no limit
number of years to be audited, however, according to the Law on the General
Provisions and Tax Procedures the taxpayers’ assessment shall be limited up to 5
(five) years. Article 13 of the Law on the General Provisions and Tax Procedures
provides that within 5 years after the date of a tax is payable or after the end of a
taxable period, a fraction of taxable year, or a taxable year, the Director General of
Taxes may issue of notice of tax underpayment assessment.

I.2.2. Audit’s time limitation

Office audit shall be carried out within 3 (three) months and may be extended for at
maximum 6 (six) months as from the date of the taxpayer fulfilling summon letter to
the date of audit report. Field audit shall be carried out within 4 (four) months and
may be extended for at maximum 8 (eight) months as from the date of audit warrant
to the date of audit report. In case of transfer pricing audit, field audit may be
extended for at maximum 2 (two) years.

I.2.3. Obligation to justify the adjustment

Upon completing the examination, the auditor shall send notification of audit
findings attached by list of tax audit findings to the taxpayer. The taxpayer is
obliged to respond the notification in writing at the latest of 3 (three) working days in
case of office audit, or 7 (seven) working days in case of field audit as from the date
of notification of audit findings received by the taxpayer.

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The taxpayer has the right to attend a closing conference to discuss or evaluate
audit findings with the auditor. The result of closing conference shall be written on
minutes of meeting and official report regarding final discussion of audit result. The
minutes of meeting shall be used as basis of audit report and shall form an integral
part of the audit report.

I.2.4. Right to contest tax adjustment

If there is a dispute between the taxpayer and the auditor relating to audit findings
in the closing conference, the taxpayer has the right to lodge a further discussion
with a panelist team. There are 2 (two) levels of the panelist team, firstly, panelist
team at the level of Tax Office and secondly, panelist team at the level of the
Regional Tax Office. The panelist team shall consist of tax officers who do not
involve in the audit. The function of panelist team is to discuss the difference
opinion between the taxpayer and the auditor and to make a conclusion on such
matters. If the taxpayer still has a different opinion with the conclusion of first level
of panelist, the taxpayer may contest the matters to the second level of panelist at
the Regional Tax Office. The conclusion of panelist shall be written on a minutes of
panelist meeting which shall form an integral part of the working audit papers.

The closing conference, including the discussion of the panelist team, shall be
carried out at the latest of 3 (three) weeks in case of office audit or 1 (one) month in
case of field audit as from the date of the taxpayer respond to the notification of
audit findings.

An official report regarding final discussion of audit result and minutes of meeting
are an integral part of the audit report. The tax payable on notice of assessment or
notice of tax collection shall be calculated in accordance to the result of closing
conference, except for the following condition:
1. if a taxpayer does not attend the closing conference but he sends written
response to the notification of audit findings, tax payable shall be calculated
referring to the notification of audit findings with taking into consideration the
taxpayer’s response;
2. if a taxpayer neither attending the closing conference nor sending written
response to the notification of audit findings, tax payable shall be calculated
referring to the notification of audit findings.

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I.2.5. Right for objection and appeal

Objection
According to Article 25 of Law on the General Provisions and Tax Procedure, a
taxpayer may file the objection letter to the Director General of Taxes related to a
notice of tax assessments issued by the Director General of Taxes, namely notice
of tax underpayment assessment, notice of an additional tax underpayment
assessment, notice of nil tax assessment, notice of tax overpayment assessment,
and withholding tax by third parties.

An objection can only be filed against the substance or content of a notice of tax
assessment, namely the amount of loss, the amount of tax, or the amount of tax
withheld based on tax laws. The due date of filing objection is 3 (three) months
from the date of notice of tax assessment dispatch or from the date of tax withheld
by the third parties. The three months limitation provides the taxpayers sufficient
time to prepare an objection letter along with the reasons.

The taxpayer shall settle the amount of tax obligation to the extent of confirmed tax
payable in the closing conference. The settlement shall be done before taxpayer
files the objection letter.

The Director General of Taxes within 12 (twelve) months as from the date of receipt
of the objection letter shall grant a decision on the submitted objection, which can
be in the form of total or partial acceptance, refusal, or increasing the amounts of
tax payable.

Appeal
Pursuant to Article 27 of Law on the General Provisions and Tax Procedure, a
taxpayer may only submit a request for appeals to the tax court on a decision on
objection issued by the Director General of Taxes.

The request for appeals should be submitted in writing with clearly stated reasons
not later than 3 (three) months from the date of the decision on objection accepted,
along with attachment of copy of the decision on objection.

The tax court shall grant a decision on the submitted appeal. The verdict of the tax
can be in the form of total or partial acceptance, disapproval, or increasing the

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amounts of tax payable. In case the appeal is disapproved or partially granted, the
taxpayer shall be imposed with an administrative penalty in the form of 100% (one
hundred percent) fine of the amount of tax as stated in the Appeal Verdict minus
the amount of tax paid prior to the objection request, and it must be paid not later
than 1 (one) month from the date of issuance of the Appeal Verdict.

II. Organisation of structures In Charge of Tax Auditing

II.1. Tax Auditing support and follow up structures (at central and
regional levels)

II.1.1. Cross-checking and investigation

The Directorate General of Taxes carries out tax auditing, preliminary evidence
audit and tax investigation. The tax auditing is carried out either at the Head Office,
under the Directorate of Audit and Collection, or at the Tax Offices. The preliminary
evidence audit and tax investigation are carried out either at the Head Office, under
the Directorate of Intelligent and Investigation, or at the Regional Tax Offices. In
other words, the Tax Offices shall only conduct tax auditing and the Regional Tax
Offices shall only conduct preliminary evidence audit and tax investigation, while
the Head Office conducts tax auditing, preliminary evidence audit, and tax
investigation.

II.1.2. Programming taxpayers to be audited

A process for selecting tax returns for audit such that all tax returns have the same
probability of being chosen, however overpayment tax returns shall be subject to
audit, except for the taxpayer who is categorized as a compliance taxpayer (a
golden taxpayer) may get pre-audit refund of tax overpayment.

Directorate General of Taxes carries out 2 (two) criteria of audit, namely routine
audit and risk based audit.
1. Routine audit
Routine audit is an audit performed with respect to the fulfillment of the
taxpayers’ rights and obligations as mandated by the tax laws. Routine audit
includes the following criteria:

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 - Taxpayer files tax return declaring tax overpayment.
- Taxpayer files tax return declaring loss.
- Taxpayer exercises merger, acquisition, spin off, liquidation, dissolution, or
leaves Indonesia forever; etc

2. Risk based audit

Risk based audit, usually called as a special audit, is an audit performed based
on high risk analysis on taxpayer non-compliance generated by manual system
(bottom up risk analysis) or by computerized selected system (top down risk
analysis). Risk analysis is an analysis to evaluate taxpayer non-compliance,
which potentially result in tax revenue at risk, especially for high risk taxpayers.

Risk based audit/special audit can be divided into 2 (two) criteria, which are as
follows:
a. Bottom up risk analysis audit.
Bottom up risk analysis audit is a special audit performed based on risk
analysis on taxpayers’ profile carried out manually by the Tax Office. Before
exercising the audit, the Tax Office shall submit the proposal of audit,
including the risk analysis to the Regional Tax Office to obtain approval. The
Tax Office shall conduct audit after receiving approval from the head of the
Regional Tax Office on the proposal.
b. Top down risk analysis audit.
Top down analysis audit is an audit performed based on the following
criteria:
1. Risk analysis of Information, data, report, and third party’s information is
carried out by the head of Regional Tax Office or by the Director of
Intelligent and Investigation.
2. Risk analysis selected by computerized selected system (selection
criteria audit). The taxpayers to be audited are selected based on a level
of their compliance. The taxpayers’ compliance level is resulted from the
computerized score system with taking into consideration of some
variables, such as external data, internal data, audit history, and industry
analysis. The risk analysis based on computerized selected system shall
be performed by the Head Office.

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 3. The consideration of the Director General of Taxes, including the
request from the taxpayer.

II.1.3. Monographs

In order to increase services and monitoring to the taxpayers, the Directorate

General of Taxes has developed a program, namely profiling and mapping of the
taxpayers. The taxpayer’s profile includes data and information relating to
taxpayers’ identity, business activities, related parties, financial statement analysis,
tax liability, exchange of information, supplier and customer, and tax gap. Besides
taxpayers’ profile, while the mapping includes information of tax potential in certain
area.

II.1.4 Follow up of tax auditing

Monitoring tax auditing performance can be carried out by either external units or
internal Directorate General of Taxes. The external unit which monitors tax auditing
performance is the Inspectorate General of the Ministry of Finance. Annually the
Inspector General of the Ministry of Finance evaluates the performance of the
Director General of Taxes. The performance of tax auditing is one of areas to be
evaluated by the Inspector General of the Ministry of Finance. To evaluate the
performance of tax auditing, the Inspector General reviews the tax audit report. The
Inspector General selects the tax audit report being evaluated based on random
selection.

Internal tax auditing performance monitoring is carried out by the Directorate of

Audit and Collection at the Head Office and the Regional Tax Office. The
Directorate of Audit and Collection is responsible to monitor the audit performance
of all the Regional Tax Offices, while the Regional Tax Office is responsible to
monitor the audit performance of the Tax Offices under its supervision.

Monitoring of audit performance within the Directorate General of Taxes shall

consist of the following activities:
1. Review
In order to monitor and improve quality of audit result performed by audit units,
for particular conditions it is necessary to review draft of audit report, especially

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 on special audit selected based on a third party’s information or other special
cases. Review shall be carried out by the Director of Audit and Collection or by
the Head of Regional Tax Office depending on the units which issue the audit
assignment.
2. Peer Review
Peer review is review carried out after the audit has been done and the notice
of assessment has been issued. The purpose of peer review is to evaluate
whether the audit is conducted in accordance with an audit standard. The audit
standard is standard auditing procedures which shall be followed by the auditor
in conducting audit. The standard shall include general audit standard,
performance audit standard, and reporting audit standard. Review shall be
carried out by the Director of Audit and Collection or by the head of Regional
Tax Office.
3. Key Performance Indicator
Besides the review and peer review as mentioned above, the audit performance
can be measured by the key performance indicator. With regard to tax auditing,
there are three key performance indicators to be achieved, namely the
percentage of the number of audit report compare to the target number of audit
report, the percentage of tax revenue receipt from the audit compare to the total
tax revenue and refund discrepancy.

II.2. The operational structures in charge of Tax Auditing

Since 2002, the Directorate General of Taxes has implemented a comprehensive

reform to encourage increase and more predictable revenues through improving
compliance and a broader tax base. In the first phase of reform the Directorate
General of Taxes among others introduced Medium and Small Taxpayer Offices,
after the two existing Large Taxpayer Offices. Before the reform there were 2 (two)
types of tax office, namely Tax Service Office and Tax Audit Office, whereby Tax
Service Office is an office whose function is to administer, to serve, and to monitor
the taxpayers while Tax Audit Office is an office assigned to performed tax audit
only. After the reform the Tax Audit Offices are merged into the Tax Offices,
therefore, the Tax Offices perform both tax audit and tax service.

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The Directorate General of Taxes of Indonesia, headed by the Director General of
Taxes, consists of a Head Office, 31 Regional Tax Offices, 4 Large Taxpayer
Offices, 9 Special Tax Offices, 18 Medium Tax Offices, and 331 Small Tax Offices.

The Regional Large Taxpayer Office (RLTO) administers large company taxpayers,
large individual taxpayers, and State owned enterprises. The RLTO consists of 2
Large Taxpayer Offices (LTO) administering large companies, 1 Tax Office
administering State Owned Enterprises, and 1 Tax Office administering High
Wealth Individual Taxpayers (HWI Tax Office).

The Special Regional Tax Office (SRTO) administers large and medium foreign
direct investment companies, foreigners and permanent establishments, and listed
companies. The SRTO consists of 6 Tax Offices administering large and medium
foreign direct investment companies, 2 Tax Offices administering foreigners and
permanent establishments, and 1 Tax Office administering listed companies.

There are 18 (eighteen) Regional Tax Offices administering both medium and small
companies and 11 (eleven) Regional Tax Offices administer small taxpayers only.
As mentioned above, there are 18 Medium Tax Offices (MTO) and 331 Small Tax
Offices (STO).

The auditing of large companies is conducted under the Tax Offices administering
large companies, namely LTO and Special Tax Offices. The large companies often
involve complex cross border transactions and related party’s transactions,
therefore for particular cases, such as transfer pricing issues, the Tax Office may
request assistance from the Head Office to solve the matters. However, for
particular cases, the Head Office conducts audit on large taxpayers depending on
the consideration of the Director of Audit and Collection.

The auditing of medium and small taxpayers is conducted under the Tax Offices
administering small and medium taxpayers, namely MTO and STO. In case of
transfer pricing audit, the Tax Office may request assistance from the Head Office
to solve the transfer pricing matters.

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II.3. The role of the information system and computer tools in the
conduct of tax auditing

In conducting tax audit, the Directorate General of Taxes has been using computer
tools in term of administrative audit and audit technique since early of 1990 to
complement the manual audit procedures. From the Head Office point of views, the
computer system is utilized to make it easier for monitoring the audit performance
of the Regional Tax Offices or the Tax Offices. By using the audit monitoring
system, the Head Office can gather data and information relating to the audit
performance in a real time basis. For auditors, the utilizing computer in conducting
audit is very useful to speed up the audit process, to get better result and to
achieve efficiency.

There are several information systems and computer tools that are being used by
the Directorate General of Taxes, as follows:
1. Administrative Audit System
With regard to administrative audit, the Directorate General of Taxes uses 2
(two) system as follows:
a. Audit Menu
Audit menu is an application to administer all procedures of audit from audit
proposal, audit approval, audit warrant, to audit report. The audit menu is
used by the Head Office, the Regional Tax Office, and the Tax Office. All
audit documents are generated by this application. .Audit menu only
provides administrative audit information.

b. Application of Tax Audit Report

Application of Tax Audit Report is a simple information system which
provides the information of the audit performance with regard to the quantity
performance, the quality performance and the auditor performance. This
application is used by the Head Office, the Regional Tax Office and the Tax
Offices. It allows the Head Office and the Regional Tax Office to analyse
and to monitor audit performance, to evaluate auditor performance, to
monitor audit process, and to supply audit history.

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2. Computer Audit Tools
In conducting audit, the auditors have just begun to utilize computer audit tools
such as audit common language (ACL) and Sesam. The computer audit tools
were introduced in 2007. Actually, the Directorate General of Taxes used to be
utilizing other computer audit tool, namely IDEA in early 1990 but it is no longer
used today.

Before computer audit tools are being used in conducting audit, the Directorate
of Audit and Collection was assisted by Technical Assistance from Swedish Tax
Agency (STA) to train the auditors using the Computer audit SESAM in 2007,
and computer audit ACL in 2008.

a. Audit Common Language (ACL)

ACL is widely accepted as the leading software for data-access, analysis
and reporting. It allows auditors to connect personal laptops to the
taxpayer’s system and then download taxpayer’s data into their laptops for
further processing. It is capable of working on large data set that enables
testing at hundred percents coverage. Moreover, it provides a
comprehensive audit trail by allowing auditors to view their files, steps and
results at any time. The popularity of the ACL is resulted from its
convenience, flexibility and reliability.

b. Sesam
Sesam is being developed to provide an easy access to the content of
relational data bases to users without specific computer training. Queries
are typed in natural language either freely or with a guided mode. The
system dynamically proposes through menus the different words and
phrases that can make up a query. Users are able to exploit the result of
their queries with standard electronic office tools or specialized applications.

III. Performance of Tax Auditing

As mentioned above, the Directorate General of Taxes measures the audit

performance by the key performance indicator, namely the percentage of the
number of audit report compared to the target number of audit report (table1), the
percentage of tax revenue receipt from the audit compared to the total tax revenue

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(table 2) and refund discrepancy. Besides that, the performance of tax auditing
could be measured by some factors, including number of audited taxpayers
compared to the number of auditors (table 3), tax collected compared to tax issued
(table 4) and average rates of cancelled rights resulting from decisions of appeal
(table 5a and table 5b).

Based on data from Application of Tax Audit Report and Audit Menu, the
performance of tax auditing on period 2009 until 1st semester 2010 is on the
following tables
Table 1
Percentage of number of
Number of audit Target number of
Year audit report to target
report audit report
number of audit report

2008 21.178 26.288 81%

2009 69.195 68.000 101.8%

Jan-June
27.115 48.954 55.4%
2010

Table 2
Year Tax revenue Percentage of tax
Total tax revenue
receipt from the revenue from audit to
(in rupiah)
audit (in rupiah) total tax revenue

2008 2.543.237.694.943 438.451.488.000.000 0.6%

2009 3.609.754.973.070 515.383.147.689.226 0.7%

Jan-June 3.522.595.106.874 259.970.833.613.654 1.4%

2010

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 Table 3
Year Number of audited Comparison of number of
taxpayers Number of auditors audited taxpayers to
number of auditors

2008 21.178 3.203 7:1

2009 69.195 3.461 20 : 1

Jan-June 27.115 4.270 6:1

2010

Table 4
Amount of tax Percentage of tax
Amount of tax issued
Year collected collected to tax
(In rupiah))
(In rupiah) issued

2008 2.543.238.000.000 19.345.046.000.000 13.1%

2009 3.609.754.973.070 12.179.267.643.445 29.6%

Jan-June 3.522.595.106.874 15.951.383.925.357 22.1%

2010

Table 5a

Revised
Year Number of Appeal DGT Lost DGT Won
Verdict

2008 2.350 1.464 834 52

2009 2.852 1.928 873 51

Jan-June 1.496 1.001 453 42

2010

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 Table 5b
Description 2008 2009 2010

DGT Lost

Cancellation of the decision on objection 95 39 39

Partially grant a taxpayer’ request 671 989 431

Entirely grant a taxpayer’ request 701 900 531

DGT Won

Refuse a taxpayer’ request 333 503 233

Not meet the formal requirements 496 359 215

Increase the amount of tax payable 4 0 1

Remove from the list of tax dispute 1 11 4

Revised Verdict

Correcting errors in writing or calculation 52 51 42

Source: Verdict of the Tax Court

IV. Recent measures to modernize Tax Auditing

A tax audit is an examination of whether or not a taxpayer has correctly assessed

and reported their tax liability and fulfilled tax obligations imposed by the tax laws.
Tax auditor’s job is to find out the true tax liability of the taxpayer as opposed to
what the taxpayer has reported in his return.

The main purpose of an effective tax audit is to promote voluntary compliance, by

reminding taxpayers of the risks of non-compliance and by sending a message to
the taxpayer community that abuses of the tax law will be detected and
appropriately penalized. The risk of being uncovered must be combined with strong
enforcement procedures and terrifying severe sanctions.

Additional revenues indirectly generated by an effective audit policy is believed to

be greater that additional revenues directly generated from individual tax audit

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To ensure effectiveness and efficiency of audit activities, the audit policy must
include the following features and requirement:
1. A comprehensive legal framework, including appropriate regime of sanctions;
2. Well-defined organizational and management process, including a well-
designed audit case selection system based on risk assessment and a
comprehensive performance measurement framework;
3. Well-defined audit technique and methodologies and adequate support
arrangements; and
4. An adequate human resource management and development programs.

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