Legal Consequences of Filing an Incorrect Tax Return
The Hong Kong Inland Revenue Ordinance (“IRO”) imposes strict requirements for individual returns filings and aims at avoiding the filing of incorrect tax returns by the individuals.
If those requirements are not met, the relevant punitive provisions empower the Commissioner of Inland Revenue, depending on:
- The nature and/or the degree of culpability of the offence and his discretion,
- To institute prosecution or to compound or to assess additional tax (which is a form of penalty) in respect of the offence.
Certain factors may mitigate the course of action to be taken by IRD and they include:
- The strength of evidence
- The amount of tax undercharged or would have been undercharged
- The sophistication of the scheme
- The period of time over which the offence was committed.
What is not Considered a Reasonable Excuse for Filing an Incorrect Tax Return?
Excuses for under-reporting of taxable income that are not normally acceptable by IRD :
- Oversight, ignorance, illiteracy or inability to comprehend one’s obligation.
- Current/previous employer should have filed the income details with IRD.
- The assessment subsequently raised by IRD has already included the under-reported income.
- Income was received at irregular intervals and under different labels and it is difficult to provide the details and work out the total.
- Return completed on the basis of monthly salary statements, which are not comprehensive.
- Return completed on the basis of Employer’s Return, which is incorrect.
- Disagreeing or not knowing that the omitted income items are taxable.
- The employer has or should have filed an amended employer’s return with IRD, and that should relieve the taxpayer from the obligation of rectifying the error or omission in his return.
Without Reasonable Excuse Cases
In relation to filing an incorrect tax return, punitive actions under the IRO include prosecution under section 80(2) against any person who without reasonable excuse, makes an incorrect return, makes an incorrect statement in connection with a claim for any deduction or allowance, gives any incorrect information in relation to any matter or thing affecting the person’s or any other person’s liability to tax. The offence is subject to a fine of $10,000 and a further fine of treble the amount of the tax undercharged.
With Willful Intention to Evade Tax Cases
For cases with wilful intention to evade or to assist any other person to evade tax, the IRD may institute prosecution under section 82(1) against such person who omits from a return any sum which should have been included; makes any false statement or entry in any return; makes any false statement in connection with a claim for any deduction or allowance; signs any untrue statement or return furnished under the IRO; gives any false answer to any question or request for information asked or made in accordance with the provisions of the IRO; prepares or maintains any false books of accounts or records; or makes use of any fraud, etc. to evade tax. The offence is subject to a fine of $50,000, a further fine of treble the amount of the tax undercharged and 3-year imprisonment.
Incorrect Tax Returns Prosecution Cases
Stated below are two of the prosecution cases instituted by the IRD under the two punitive sections of the IRO:
- A taxpayer was charged with filing an incorrect tax return by making an incorrect statement in connection with the claim for elderly residential care expenses for maintaining an dependent, contrary to section 80(2)(b) of the IRO. Investigations by IRD found that the dependant individual had already passed away during the relevant period. The defendant was fined a total of $10,000 after pleading guilty.
- A couple that was convicted of evading salaries tax were sentenced to imprisonment of 10 weeks and three weeks respectively. The defendants pleaded guilty of evading tax, willfully with intent, by making false statements in connection with claims for deduction of home loan interest (“HLI”) and expenses of self-education in their tax returns, contrary to section 82(1)(c) of the IRO. The IRD found that the total amount of the false deduction claims for all the six years was $875,181 for the wife and $351,115 for the husband. In addition, the IRD also found that the mortgage on which the HLI was claimed had already been released at the time when the false deduction claim was made.
Considering the serious legal and financial consequences of filing an incorrect tax return, one should pay due attention when doing his/her tax filing. In case of doubts, professional advice should be sought. We at HKWJ Tax would be pleased to assist you with ensuring all aspects of tax compliance are adhered to, whilst exploring legitimate ways in optimising your tax liabilities. Should you have any questions/require our services, please feel free to contact us.