How Often Does Japan Audit People Who Fail to File Tax Returns? Statistics and Practical Risks

If you have income that should be reported in Japan but have not filed a tax return, you may be wondering how likely it is that the National Tax Agency (NTA) will conduct a tax audit.

Although not every non-filer is audited, the NTA actively investigates cases where substantial income has gone unreported. The average amount of unreported income discovered during these audits is surprisingly high.

In this article, we will look at the official statistics before and after the COVID-19 pandemic and explain what they mean for foreign residents and business owners in Japan.

My name is Taisei Koshida, a Certified Public Accountant and Licensed Tax Accountant in Japan. I assist foreign individuals and business owners with Japanese tax returns, tax audits, international tax, and accounting matters in Japan.

Before The Pandemic: Tax Audits of Non-Filers in Japan

In the fiscal year of 2017, the number of tax audits conducted for individuals who failed to file income tax returns in Japan was 7,779.

The average amount of unreported taxable income per case was 21,360,000 yen, and the additional tax obligation per case was 2,670,000 yen.

These figures show that even before the COVID-19 pandemic, the NTA was actively investigating individuals who had failed to file required tax returns.

After The Pandemic: Tax Audits of Non-Filers in Japan

In the fiscal year of 2021, the number of tax audits conducted for individuals who failed to file income tax returns in Japan was 3,828.

The average amount of unreported taxable income per case was 29,230,000 yen, and the additional tax obligation per case was 3,230,000 yen.

Although the number of audits was much lower than before the pandemic, the amount of unreported income found per case was considerably higher.

More Recent NTA Statistics

Tax audits of non-filers did not end with the pandemic.

According to more recent NTA statistics, 5,274 field audits were conducted on individuals who had failed to file income tax returns in fiscal year 2023.

The average amount of unreported income per case was 25,900,000 yen, while the average additional tax assessed per case was 4,170,000 yen.

The NTA continues to state that it actively investigates non-filers by collecting and using information and conducting both field audits and other forms of contact.

What These Tax Audit Statistics Mean

Although the number of tax audits decreased during the COVID-19 pandemic, the average amount of unreported income found per audit increased significantly.

The more recent statistics also show that non-filers remain an important area of tax enforcement in Japan.

The NTA states that it collects and uses various types of information to identify non-filers and actively investigates them through both field audits and other forms of contact.

In other words, you should not assume that failing to file a tax return will go unnoticed simply because not every non-filer receives a field audit.

If you would like to know more about how tax audits are actually conducted in Japan, please see:

How Tax Audits Work in Japan: What Foreign Business Owners Should Expect

What Happens If You Fail to File a Tax Return?

If you fail to file a required tax return in Japan, you may be required to pay:

• The original income tax due

• A failure-to-file penalty

• Delinquent tax

• Additional penalties in certain serious cases

The longer you wait, the more costly the situation can become.

In many cases, voluntarily filing before receiving advance notice of a tax audit can reduce the failure-to-file penalty.

Therefore, if you discover that you should have filed a Japanese tax return for a previous year, it is generally better to deal with the issue as early as possible.

How Foreign Residents Can Reduce Their Tax Risk

Many foreign residents are unfamiliar with the Japanese tax system, particularly if they receive overseas income, investment income, or operate businesses in multiple countries.

International tax issues can also make it difficult to determine whether income needs to be reported in Japan.

Seeking professional advice before the filing deadline is generally much less expensive than dealing with a tax audit afterward.

If you are unsure whether you have a filing obligation in Japan, obtaining advice early can help you avoid unnecessary penalties and tax problems.

If you are a U.S. citizen or resident preparing a Japanese tax return, you may also find this article helpful:

How to Prepare a Japanese Tax Return for U.S. Non-Permanent Residents

Frequently Asked Questions

Does Japan audit every person who fails to file a tax return?

No.

However, the National Tax Agency actively investigates non-filers and uses collected information to identify cases that may require investigation.

Not receiving a tax audit immediately does not mean that a filing obligation has disappeared.

Can I reduce penalties by filing voluntarily?

In many cases, yes.

If you voluntarily file a late tax return before receiving advance notice of a tax audit, the failure-to-file penalty is generally 5% of the tax due.

Different and generally higher rates may apply if you file after receiving advance notice of an audit or after an audit has begun.

Therefore, if you discover an unfiled tax return, dealing with it voluntarily and promptly can make a significant difference.

How far back can the Japanese tax authorities go?

The applicable period depends on the circumstances.

In many cases, Japanese tax authorities may assess tax for previous years, and longer periods may apply where there has been fraud or other serious misconduct.

If you have several years of unfiled tax returns, it is important to review each year individually rather than assume that older years no longer need attention.

I recently moved to Japan. Do I still need to file?

Simply having recently moved to Japan does not, by itself, determine whether you have a Japanese tax filing obligation.

Once you become a tax resident of Japan, Japan-source income, such as employment income from work performed in Japan or rental income from real estate located in Japan, may be taxable in Japan.

In addition, if you are not a Japanese national, you may qualify as a non-permanent resident for Japanese tax purposes. Under Japan’s remittance-based taxation rules, certain foreign-source income may also become taxable in Japan depending on your remittances.

For more information about non-permanent resident taxation and remittance rules, please see:

Non-Permanent Resident Tax Rules in Japan: What Foreign Residents Should Know

Therefore, both your tax residency status and the source of your income need to be considered.

If you recently moved to Japan and receive income from the United States, this article explains the Japanese tax treatment in more detail:

Moving to Japan? How Your U.S. Income Is Taxed in Japan

Our accounting firm in Japan regularly assists foreign residents and international business owners with Japanese tax returns, tax audits, international tax, and accounting matters.

If you are unsure whether you need to file a Japanese tax return, or if you have missed previous filings, please feel free to contact us through our inquiry form.

We will be happy to discuss your situation confidentially and explain the practical steps available to you.

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