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.

Back tax is assessed and penalties are generally imposed where discrepancies are detected. During 2002-03, the Field Audit and Investigation Unit completed 1,862 cases (including avoidance and prosecution cases) and assessed back tax and penalties of about $2.05 billion (Figure 32).

**Figure 32 Results of the Field Audit and Investigation Unit**
Results	1999-2000	2000-01	2001-02	2002-03
Number of cases completed	1,874	1,920	1,921	1,862
Understated earnings and profits (Dollars million)	10,232.3	9,310.8	8,940.9	9,316.3
Average understatement per case (Dollars million)	5.5	4.8	4.7	5.0
Back tax and penalties assessed (Dollars million)	2,318.9	2,154.8	2,101.5	2,052.5
Back tax and penalties collected (Dollars million)	2,147.8	1,962.4	1,787.6	1,949.1

Field audit is conducted on both corporations and unincorporated businesses. 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.

Two of the 14 Field Audit sections concentrate on tackling tax avoidance schemes, whereas other investigation officers and tax auditors handle avoidance cases on an operational needs basis.

During 2002-03, the Field Audit and Investigation Unit completed 200 tax avoidance cases and assessed back tax and penalties of $565 million (Figure 33).

**Figure 33 Results of the Audit on tax avoidance cases**
Results	1999-2000*	2000-01	2001-02	2002-03
Number of cases completed	162	193	202	200
Understated earnings and profits (Dollars million)	3,864.3	2,363.0	2,783.7	3,131.0
Average understatement per case (Dollars million)	23.9	12.2	13.8	15.7
Back tax and penalties assessed (Dollars million)	654.1	445.1	510.2	565.4

* the second Anti-tax avoidance section 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 9 Investigation sections focus 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 2002-03, the Unit successfully prosecuted 4 tax evasion cases. The first case involved the understatement of business profits. Two business partners were convicted of making fraudulent tax returns and were jailed for 3 to 4 months. In the second case, a suspended sentence of 6 months was imposed on the two joint property owners convicted of understating rental income. In the other two cases, the employers were fined for filing incorrect Employer's Returns for their employees.

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 2002-03, back tax and penalties of $23.2 million were assessed on 4,600 completed property tax cases (Figure 34).

**Figure 34 Results of the Property Tax Compliance Checks**
Results	1999-2000	2000-01	2001-02	2002-03
Number of cases completed	4,401	4,600	4,600	4,600
Understated rental income (Dollars million)	194.9	203.4	193.7	194.0
Back Tax and penalties assessed (Dollars million)	23.3	24.4	23.1	23.2

Apart from the enforcement work to investigate, detect, and take action against offenders, the Department aims at enhancing taxpayers' compliance with their tax obligations by providing various guidance, support and education. To increase the equity and transparency of its enforcement activities, the Department has expanded and published its penalty policy on the website and fax hotline during the year. Various initiatives have also been taken to combat and deter non-compliance. New computer applications have been rolled out to facilitate the identification of high-risk cases for audit and investigation. Inter-unit co-ordination has been strengthened to detect aggressive avoidance schemes for in-depth enquiries.