Two words that send a jolt of fear into every law-abiding citizen: “Tax Audit.” Over the next month we are going to share a few articles that help you understand what the South Korean tax audits are, how the government determines when they will be implemented, and how to avoid them in the future.
If you hear that you are being audited, it is probably from your local district tax office, such as the Yongsan Tax Office (용산세무서) or the Gangnam Tax Office (강남세무서) who has determined that they need to check on you. The following are the main types of audits that they may perform:
Regular or Irregular Tax Audit (정기조사 및 수시조사)
Regular tax audits are conducted when there are suspicions of dishonesty as a result of a regular analysis of data in the filed reports and tax information. Audits may also be conducted if it is deemed necessary to verify the adequacy of the reports as they have not been investigated under the same details in the past four years.
Fund Audit for Property Purchase (자금출처조사)
When a person or organization purchases real estate that appears to be too expensive to afford based on the reported income level, a person or business may be asked to submit financial data of where the funds for the purchase were obtained. As of this writing it has become almost mandatory to submit proof of the source of funds when purchasing property in highly sought after areas of Seoul, like the Gangnam area. This proof usually takes the form of tax withholding documentation to prove your income, proof of inheritance, etc.
Inheritance, Gift Tax Audit (증여세, 상속세 세무조사)
The tax office will always review whether your tax filings when you receive a substantial inheritance or large gift. They will seek to make sure that it was received in accordance with current tax laws. Depending on the complexity of the report and the amount of taxes paid, the tax office may require the selection of a tax agent by setting the investigation period (usually with three months).
VAT Audit (부가세 세무조사)
This audit aims to prevent fraudulent VAT filings that seek to avoid proper VAT payments. Under this type of audit the tax office will ask for documentation such as a contract, payment receipts, etc. to prove that you accurately submitted your applications for your quarterly VAT refund.
Audit for a Borrowed-name Bank Account (차명계좌 세무조사)
One common way of avoiding taxes is to receive money into a bank account other than the business actually performing the service. If annual sales reported are substantially lower than the apparent scale of the business, or a whistle-blower reports this fraudulent practice, an investigation may be launched.
Tax Audit for High Income Earners (고소득 자영업자 세무조사)
Individuals who receive an extremely high amount of private income may be subject to this type of audit. Frequent targets are celebrities, lawyers, and renowned instructors (Korea’s passion for education can lead to extremely high-paid educators). The temptation for these sorts of professions to overreport expenses is very high. If the tax office finds that the incurred expenses are very high in relation to sales, they may initiate this type of audit. As Korea’s corporate tax rate is significantly lower than that of individuals, we strongly recommend that you avoid this type of audit by setting up a corporation, even if your sales seem too small to merit a corporate entity.
Doctor, Clinic & Hospital Tax Audits (병의원 세무조사 등)
Individual doctors cannot legally establish a corporation in Korea. This means that although doctors are often high income earners like people who fall into the previous audit category, they cannot create a corporation to reduce their tax burden. This makes it even more tempting and simultaneously report excessive costs to avoid taxes. Doctors are categorically classified as the highest taxpayer, so even a few of them are subject to high fines.