The Field Audit and Investigation Unit of the Hong Kong Inland Revenue Department (“IRD”) is responsible for conducting tax field audits and investigations on businesses and individuals with a view to fight against possible tax evasion and avoidance.

In field audit, IRD officers visit taxpayer’s business premises and examine the accounting records kept by the taxpayer in order to see if the reported profits are correct.

Tax investigation is an in-depth examination where tax evasion is suspected. It usually covers 6 years of assessment prior to the year of assessment in which the investigation commences. In the case of fraud or wilful evasion, the investigation can be extended to cover 10 years of assessment.

The activities of the Field Audit and Investigation Unit are largely targeted at areas where non-compliance is apparent. Rigid case selection criteria are not generally applied. IRD uses the Assess First Audit Later (“AFAL”) system for screening tax returns for automated assessment and selecting cases for post assessment audit and investigation. Cases may also be selected on a random basis as a means of promoting voluntary compliance. Field audit or investigation is normally initiated where there are characteristics or indications of non-compliance, such as:

(a)	the auditors’ report in respect of the accounts of a company is heavily qualified;
(b)	a business, having regard to its nature of the business and operation, has an unreasonably low turnover or profit percentage;
(c)	persistent failure to lodge or late lodgement of tax returns;
(d)	failure to keep proper business records; and
(e)	failure to provide material information as requested.

Moreover, where non-compliance is prevalent in a particular trade or industry, field audits or investigations are more likely undertaken in respect of the trade or industry concerned.

A field audit or investigation can be a time-consuming exercise. Get your accounts in order and avoid possible characteristics or indications of non-compliance.

Source：Hong Kong Inland Revenue Department’s website

- https://www.ird.gov.hk/eng/pdf/dipn11.pdf
- https://www.ird.gov.hk/dar/2007-08/eng/chapter5/content.htm