Most Singapore SMEs never expect to be selected for an IRAS audit — and then a letter arrives. The Inland Revenue Authority of Singapore reviews roughly 3–5 percent of active company files every year through its various audit programmes: Corporate Income Tax (CIT) reviews, GST audits, Transfer Pricing reviews, and combined risk-based enquiries. If your company is picked, the difference between a smooth two-week resolution and a six-month ordeal is preparation.
This guide sets out what to expect from an IRAS tax audit, what documents to gather, how to handle interviews, and how to reduce the risk of adjustments and penalties.
Types of IRAS audit and how they start
IRAS conducts audits in several forms:
- Desk audit: A letter or email requesting documents. Handled by correspondence. Most CIT reviews start this way.
- Field audit: Officers visit the company premises. Rare for SMEs but standard for larger companies and Transfer Pricing cases.
- GST audit: Focused on GST returns, purchase and sales invoices, and input tax claims.
- PIC / claims audit: Historical Productivity and Innovation Credit audits still surface for older Years of Assessment.
- Voluntary Disclosure Programme review: Triggered when the company itself discloses an error.
An audit almost always begins with a formal letter under the Income Tax Act 1947 Section 65B (production of documents) or Section 65 (power to require information).
Why companies get selected
IRAS uses a risk-based selection engine that flags returns with any of the following characteristics:
- Significant year-on-year variance in revenue, gross margin or expenses without a stated reason.
- Large deductions relative to the industry benchmark (entertainment, motor vehicles, professional fees).
- Recurring losses year after year, especially where the company still pays directors’ remuneration.
- Related-party transactions without transfer pricing documentation.
- GST refund claims — almost automatic review above a threshold.
- Whistleblower reports or matching data from third-party sources (bank interest, dividend income, CPF submissions).
The first response letter
Never ignore an IRAS letter, and never assume it will go away if you delay. Missing the response deadline (usually 21 or 30 days) means IRAS may proceed on best-judgement assessments and issue Notices of Additional Assessment.
Best practice within 48 hours of receiving the letter:
- Acknowledge receipt to the case officer by email or by writing back on the myTax portal.
- Ask for a reasonable extension (usually granted for another 21 days) if you need it.
- Read the letter carefully — the specific accounts, Years of Assessment and transactions requested reveal what IRAS is looking for.
- Engage your tax agent, accountant or the professional who signed off the return. If you do not have one, engage one now.
Documents IRAS commonly requests
For a Corporate Income Tax audit:
- General ledger, trial balance and detailed financial statements for the years under review.
- Bank statements and reconciliations.
- Sales invoices and customer contracts for a sample of significant transactions.
- Purchase invoices, supplier contracts and payment vouchers for significant expenses.
- Fixed asset register and capital allowances schedule (Section 19/19A).
- Directors’ remuneration workings, including CPF and IR8A/IR21 reconciliation.
- Detailed breakdown of all “Other expenses” or “Sundry expenses” lines.
- Entertainment log with client names, purposes and receipts.
- Motor vehicle running-cost breakdown (private car expenses are non-deductible).
- Related-party transaction schedules and any transfer pricing documentation.
For a GST audit, add: input tax listings, tax invoices supporting each claim, import permits (for zero-rated imports), commercial invoices, shipping documents, and evidence that overseas services meet zero-rating conditions.
Working with the IRAS officer
Do
- Answer questions factually and briefly. Do not volunteer information beyond what is asked.
- Provide clean, organised documents. A well-tabulated schedule signals competence.
- Route all communications through the tax agent if you have one.
- Keep contemporaneous notes of every phone call.
- Ask for clarification in writing if a request is ambiguous.
Don’t
- Do not backdate or alter documents. This is a criminal offence under Section 96A of the Income Tax Act.
- Do not argue the technical position without supporting evidence.
- Do not go quiet mid-audit. Silence is interpreted as non-cooperation.
- Do not sign anything you do not fully understand.
Common findings and how to respond
After the review, IRAS typically issues a “Findings Letter” listing proposed adjustments. Common findings for Singapore SMEs:
- Disallowed entertainment. Response: provide detailed logs, client names and business purpose. Where records are genuinely missing, accept the adjustment and pay.
- Personal expenses through company. Response: reclassify as director’s remuneration (attracting CPF and personal income tax) rather than trying to defend as company expense.
- Under-declared income from cash sales. Response: reconstruct from bank deposits and daily sales books; agree the adjustment.
- Related-party transactions not at arm’s length. Response: commission a benchmarking study; consider Advance Pricing Arrangements going forward.
- Wrongly claimed zero-rated GST on overseas services. Response: check the Section 21(3) conditions and, where wrongly claimed, offer voluntary payment plus penalty.
Penalties
IRAS penalty rates (Income Tax Act Section 95 and GST Act Section 46):
| Situation | Penalty rate |
|---|---|
| Voluntary disclosure within grace period | No penalty or nominal 5% |
| Voluntary disclosure after grace period | 5% |
| Non-negligent error uncovered in audit | Up to 200% of tax undercharged |
| Wilful evasion | Up to 400% plus criminal prosecution |
Voluntary Disclosure Programme
If, at any point before you receive an audit letter, you realise an error was made, the IRAS Voluntary Disclosure Programme (VDP) is a way to correct it with reduced penalty. Disclosures within a one-year grace period from the original filing usually attract no penalty. Disclosures beyond a year attract 5 percent per year (capped). VDP is not available once an audit has started — timing matters.
Records retention
Companies must keep proper records for at least five years from the end of the Year of Assessment, per Income Tax Act Section 67. GST records must be kept for at least five years from the end of the accounting period. For related-party transactions or long-running loans, we recommend keeping documents indefinitely.
How to reduce future audit risk
- Keep detailed contemporaneous records. Assume every entertainment expense will be queried — note who, why and outcome at the time.
- Prepare transfer pricing documentation early once related-party transactions exceed the reporting threshold.
- Reconcile IR8A (annual employee remuneration) to the payroll ledger before filing.
- Reconcile GST F5 to the general ledger every quarter.
- Adopt a robust Chart of Accounts that separates deductible from non-deductible expenses.
- Use accounting software with an audit trail (Xero, Jaz, QuickBooks). Handwritten ledgers still exist in Singapore SMEs and always attract more scrutiny.
Final word
An IRAS audit is a stress test of your record-keeping, not an interrogation of your character. Companies with clean records, arm’s-length related-party dealings and honest disclosures typically finish audits in weeks with modest adjustments, if any. Companies with sloppy records finish them in months with substantial penalties.
Raffles Corporate Services acts as tax agent for many Singapore SMEs and handles IRAS correspondence, VDP submissions, and audit response letters. If you have received an IRAS letter or want to strengthen your defences before one arrives, get in touch.
— The Editorial Team, Raffles Corporate Services