How the South Korean Tax Authority Chooses Businesses and Individuals to Audit

 

Last month we took a look at the many different types of audits that Korean tax officials have at their disposal. Just learning to understand the different types of tax audits will help you learn to avoid them, but here we’re going to make sure that you understand exactly how a business or individual could be selected for an audit by the local tax authorities. Try to avoid these – if you can!

A Third Party Report of Tax Evasion by a Business / Person (Direct report to NTS)

This is the #1 thing that can get you audited – and sadly you have little to no control over it. If a disgruntled former employee or customer – or even a competitor – were to report you or your organization to the National Tax Office (NTS) for tax evasion, then it is highly likely that the NTS will follow up by checking – with an audit. In fact the NTS has even been known to reward people for turning in tax evaders, thereby increasing the number of audits substantially. 

This type of audit can also be very difficult to respond to because it is often based on very little in the way of concrete accusations and detailed examples of tax evasion. 

The thing you can do to be ready in the event of a report by a third party is to always conduct yourself in a professional manner. The tax authorities are very understanding in Korea, and will give businesses and individuals the benefit of the doubt in most cases. Nonetheless, it’s their job to make sure that everyone pays their fair share of taxes. Be honest and above board and you shouldn’t have any problems. 

Fraudulent Account Reporting

Companies with relatively high revenue can sometimes seek to avoid taxes by not reporting their sales. These sorts of investigations are typically handled by the higher ranking NTS authorities, and the targets of these sorts of investigations are medium to large enterprises. Small companies are rarely investigated for.  

Unreasonable Acquisition of Assets / Repayment of Debt in Relation to Reported Income

Usually wholesalers, retailers and high-income professionals are the subject of these sorts of investigations, as it is relatively easy for them to avoid reporting income and it is. 

In particular, Korean tax authorities are quite suspicious of large amounts of real estate purchases. When a company buys real estate and the income reported by the company is relatively low, the tax authority becomes suspicious that there might be some income that has not been reported by the company. 

There are other actions that can lead to a company being subjected to an audit of course. The Korean National Tax System collects all credit card transactions, all VAT tax invoices, and all individual income data in Korea. With the incredible abundance of information they take in and the increasing use and application of “big data,” the National Tax Service has become very adept at spotting underhanded transactions, particularly at bigger companies. They don’t worry too much about small fish, however. 

Audits of major shareholders in corporations often correspond with audits of companies. Tax authorities are very interested in financial transactions that happen between shareholders and corporations. All too often investors view the company assets as their own. Be sure to treat your company as a completely separate entity and record all financial transactions between shareholders and the company in detail.

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