Surviving an LHDN Tax Audit

Most guidance on Malaysian tax audits describes a desk audit and a field audit. Neither term appears in the framework LHDN actually operates. The current document — the Rangka Kerja Audit Cukai Pendapatan dan Majikan, effective 15 March 2025 — uses two different methods, and the distinction between them decides how much notice you get and how long the whole thing runs.

That framework also did something structural. It revoked five separate frameworks and replaced them with one: the Tax Audit Framework of 1 May 2022, the Finance and Insurance Tax Audit Framework of 1 May 2022, the Petroleum Tax Audit Framework of 1 May 2022, the Employer Audit Framework of 1 October 2021, and the Withholding Tax Audit Framework of 1 August 2015. If a source you are reading cites any of those, it is describing revoked procedure.

Semakan umum and semakan menyeluruh — not desk and field

Semakan umum (general review) is document review conducted at LHDN offices only. It covers income adjustments, employer compliance checks, Labuan business activity reviews and anything resolvable by correspondence. It can be escalated to a comprehensive review, and you will be told in writing if it is.

Semakan menyeluruh (comprehensive review) involves an interview about the business modus operandi and can be conducted at your premises, at an LHDN office (in person or online), or at any other place both sides agree — including your tax agent’s office. It covers all business documents: income records, expense and allowance claims, agreements tested for substance over form, compliance with the conditions of approved incentives, withholding deduction and remittance, and payroll records.

Only a comprehensive review involves an audit visit. A general review never does.

Both start the same way: a Surat Memohon Dokumen dan Maklumat issued by official email or post, with 14 calendar days to respond. Where a visit is planned, a separate Surat Pemberitahuan Lawatan Pematuhan must be issued at least 14 calendar days before the visit date, stating the visit date, the records to prepare, the years of assessment covered, the officer’s name and the expected duration. You may apply to postpone for reasonable and unavoidable cause.

There is one situation where no letter comes at all: where LHDN already holds clear documents and information forming a basis to raise an assessment, the request letter is not issued, and the notice of assessment arrives with the adjustment details and tax computation attached.

What LHDN says about how cases are picked

The framework is brief but specific. Selection is by computer system analysis against defined tax-risk criteria, and from information sources that “may change from time to time”. Three bases are named:

• information received from third parties;
• industry issues; and
• the amount of controlled transactions made by a company relative to significant transaction values.

The third is the transfer pricing hook, and it sits alongside a separate framework — the Rangka Kerja Audit Cukai Harga Pindahan, effective 31 July 2025 — which carries its own graduated s.113B(4) penalties for missing contemporaneous documentation.

The framework also states plainly that selection does not mean the taxpayer has committed an offence. That is worth quoting back to a nervous board.

Years covered, and the bar that isn’t there

Audit activity	Typical coverage	Statutory time bar
Income tax (other than withholding, employer, Labuan)	up to 3 years of assessment	5 years, s.91(1)
Withholding tax	up to 3 years of assessment	5 years, s.91(1)
Employer audit	up to 2 years of remuneration	s.83 offences prosecutable up to 12 years from the offence, s.121(1)
Labuan business activity	up to 3 years of assessment	5 years, s.6(2) LBATA

The critical line sits in the last column of the framework’s own table: the coverage limit does not apply where the audit involves fraud, wilful default or negligence. That is s.91(3) of the Income Tax Act 1967 — and negligence, not just fraud, is enough to remove it.

The penalty ladder

For audit findings involving understated or omitted income, s.113(2) permits a penalty equal to the tax undercharged — 100%. The framework applies a concessionary scale instead:

Situation	Rate under s.113(2)
First offence	15%
Second offence	30%
Third and subsequent	45%
Technical adjustment	0%
Tax fraud, wilful default	100%
Voluntary disclosure after the return filing deadline	15%
Voluntary disclosure within 6 months of the filing deadline, where an amended return was filed first	10%

Two refinements decide which row you land on.

Offence counting has a fixed reference window. Whether you are a first or second offender is determined by your record of s.113(2) penalties between 1 January 2020 and 30 April 2022. No penalty in that window means any audit finding from 1 May 2022 onwards is treated as a first offence at 15%. A penalty in that window means it is treated as a second offence at 30%.

Technical adjustment is narrower than it sounds. It means a difference in interpretation of the tax law, determined on the facts and issues of each case. It is expressly unavailable where LHDN has already stated its position through a Public Ruling, Guideline, Practice Note, Income Tax Rules or an exemption order. Once the Board has published a view, disagreeing with it is not a technical adjustment.

The Director General may reduce or remit a penalty under s.124(3).

The voluntary disclosure calculus

The offer is time-limited in a very precise way. Voluntary disclosure means a written disclosure to the relevant State Operations Director or Division Director, made after the return filing deadline and at any time before audit action begins — and audit action begins on the date of the Surat Memohon Dokumen dan Maklumat.

So the calculus is:

• Before the letter: 15% (or 10% in the narrow amended-return case).
• After the letter: 15% if this is genuinely your first offence, 30% or 45% if not, 100% if the facts support wilful default.

For a first-time taxpayer with a straightforward omission, disclosure and audit finding land on the same 15%. The value of disclosing is in the tail: it takes the 30%, 45% and 100% outcomes off the table, and it lets you frame the facts first.

Two conditions are easy to trip over. The disclosure must come with a defined document set — the return, audited accounts or income statement, incentive information and condition compliance, the complete original and amended tax computations, and full details of the issues with supporting ledgers. Submitting an incomplete set without reasonable cause means the disclosure is not accepted. And the concession is only offered to taxpayers who are compliant with their return-filing obligations — a company with outstanding returns cannot buy its way into the 15%.

Timelines you can hold LHDN to

Audit visits run one to three days, extendable for the size and complexity of transactions, the form of records kept, and the level of cooperation given.

Case settlement periods run from the start of the audit — the date of the request letter for a general review, the first day of the visit for a premises-based comprehensive review, or the date of the Surat Penentuan Permulaan Tempoh Penyelesaian Kes where the comprehensive review happens at an LHDN office:

Audit type	Settlement period
Tax audit / employer audit	90 calendar days
Withholding tax — payor	90 calendar days
Withholding tax — payee	180 calendar days
Finance and insurance — brokers, banks, leasing, intermediaries	90 calendar days
Insurance and takaful business, including reinsurance and retakaful	240 calendar days
Petroleum — exploration and production	450 calendar days

They do not apply where further confirmation is required from other parties — which is a wide exception, but the periods are still a legitimate reference point when a case has gone quiet.

A settled audit will not be re-audited for the same year of assessment and the same issue. New issues or new information for that year can still reopen it.

After the finding

Adjustments, tax and penalty arrive in a Surat Penyelesaian Kes, followed by the notice of assessment or a notice of non-chargeability. Where nothing is found, you get a Surat Penyelesaian Kes Tanpa Pelarasan Pendapatan.

Payment is due within 30 days of the date the notice of assessment is raised, through ByrHasil using the Bill Number or TIN. Instalments can be applied for, with justification, to the State Operations Director or Division Director. Miss the deadline or default on an agreed instalment and an increase applies to the unpaid balance.

The audit finding and the appeal are separate tracks. Disagreeing with the finding does not suspend payment — see appealing a tax assessment for the 30-day Form Q clock that starts when the notice is served.

Common mistakes

Working from the 2022 framework. It was revoked on 15 March 2025 along with four others. The penalty table survived largely intact; the procedure did not.

Treating the 14 days as soft. Failure to respond does not stop the audit — it lets LHDN proceed on the documents it already has, and the framework expressly warns that claimed expenses may be disallowed and an additional assessment raised.

Assuming records held offshore are LHDN’s problem. The framework puts the burden on the taxpayer to obtain documents held abroad by a related company and produce them complete — at your premises for a comprehensive review, or before the visit.

Calling every adjustment a technical adjustment. If LHDN has published its position in a Public Ruling, guideline, practice note, rules or an exemption order, the 0% rate is off the table.

Disclosing after the letter arrives. The window closes on the date of the Surat Memohon Dokumen dan Maklumat, not on the date of the visit.

Forgetting the employer limb. The same framework covers employer audits under s.83 and s.107, where the exposure is a compound under s.124 rather than a percentage penalty — and repeat offences raise the compound amount.

What’s next

If a request letter has landed, diary the 14 days, confirm which review method is running, and check whether the years cited are inside the three-year coverage or whether LHDN is signalling negligence by reaching further back.

If nothing has landed and you know there is an error in a filed return, the disclosure arithmetic above is the whole decision — and it only works while you are ahead of the letter.

If the issue is transfer pricing, read the separate 2025 transfer pricing audit framework alongside this one; its documentation penalties run on a different and much steeper scale.