Field Audit and Investigation

The Field Audit and Investigation Unit is responsible for conducting field audits and investigations on businesses and individuals with a view to combating tax evasion and avoidance.

Field audits and tax investigations require not only the application of accounting skills and taxation knowledge to different business environments, but also the extensive use of interviewing, negotiating and investigative techniques.

Back tax is assessed and penalties are generally imposed where discrepancies are detected. During 2001-02, the Field Audit and Investigation Unit completed 1,921 cases (including avoidance and prosecution cases) and assessed back tax and penalties of about $2.1billion (Figure 32).

**Figure 32 Combined results of Investigation and Field Audit**
Results	1998-99	1999-2000	2000-01	2001-02
Number of cases completed	1,812	1,874	1,920	1,921
Understated earnings and profits (Dollars million)	9,075.2	10,232.3	9,310.8	8,940.9
Average understatement per case (Dollars million)	5.0	5.5	4.8	4.7
Back tax and penalties assessed (Dollars million)	2,141.3	2,318.9	2,154.8	2,101.5
Back tax and penalties collected (Dollars million)	2,074.7	2,147.8	1,962.4	1,787.6

The work of field auditors entails site visits to business premises and examination of accounting records of taxpayers in order to ascertain whether correct returns of profits have been made. The Field Audit activities are intended to encourage voluntary compliance with taxation requirements under the law. By giving the Department's enforcement activities a more visible presence, it is hoped that taxpayer will be reminded of the need to keep sufficient business records and lodge correct tax returns.

In 2001-02, Field Audits were conducted on corporations and unincorporated businesses by 12 Field Audit teams.

Two of the 12 Field Audit teams concentrated on tackling tax avoidance schemes, whereas other investigation officers and tax auditors handled avoidance cases on an operational needs basis.

During 2001-02, the Field Audit and Investigation Unit completed 202 tax avoidance cases and assessed back tax and penalties of $510 million (Figure 33).

**Figure 33 Results of the Audit on tax avoidance cases**
Results	1998-99	1999-2000*	2000-01	2001-02
Number of cases completed	156	162	193	202
Understated earnings and profits (Dollars million)	2,032.9	3,864.3	2,363.0	2,783.7
Average understatement per case (Dollars million)	13.0	23.9	12.2	13.8
Back tax and penalties assessed (Dollars million)	303.3	654.1	445.1	510.2

* the second Anti-tax avoidance team was set up in October 1999

Investigation officers are responsible for conducting in-depth investigations where tax evasion is suspected, and taking penal action (including prosecution proceedings in appropriate cases) to create a deterrent to tax evasion.

Two of the 11 Investigation teams focused on criminal investigation of tax evasion.

Tax evasion is a serious crime. If a person is convicted of tax evasion, the Inland Revenue Ordinance provides for a maximum custodial sentence of three years.

In 2001-02, the Unit successfully prosecuted 4 tax evasion cases. Two cases involved the understatement of business profits. One taxpayer was sentenced to 3 months' imprisonment and the other was ordered to pay a fine of about 90% of the tax undercharged. The third case involved the omissions of rental income chargeable to Property Tax. The fourth case involved the omission by an employer of the Employer's Returns for its salaried directors. Both of them were ordered to pay fines.

In addition to conducting audits on businesses, the Unit also carries out verification checks on the correctness of rental income reported by property owners. During the year 2001-02, back tax and penalties of $23.1 million were assessed on 4,600 completed property tax cases (Figure 34).

**Figure 34 Results of the Property Tax Compliance Checks**
Results	1998-99	1999-2000	2000-01	2001-02
Number of cases completed	4,642	4,401	4,600	4,600
Understated rental income (Dollars million)	194.0	194.9	203.4	193.7
Back Tax and penalties assessed (Dollars million)	23.2	23.3	24.4	23.1

To tackle tax avoidance and evasion, the Department will step up various initiatives. These include the redeployment of more resources to field audit activities, the introduction of a customized computer-assisted case selection program, the strengthening of the data bank and the setting up of inter-unit task forces to detect high-risk cases and aggressive avoidance schemes for audit and investigation.