How Often Does Japan Audit People Who Fail to File Tax Returns? Statistics and Practical Risks
【Koshida Accounting Firm Column Date:】
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 compliance and international taxation.
Before The Pandemic
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.
After The Pandemic
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.
What These Numbers Mean
Although the number of tax audits decreased during the COVID-19 pandemic, the average amount of unreported income found per audit increased significantly.
This suggests that the National Tax Agency focused its resources on cases involving larger amounts of unreported income rather than conducting a greater number of audits.
In other words, while the chances of being audited may appear lower, individuals with substantial undeclared income may face a higher risk of investigation.
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:
• Income tax
• Late filing penalties
• Interest tax
• Additional penalties in serious cases
The longer you wait, the more costly the situation can become.
In many cases, voluntarily filing before the tax office contacts you can significantly reduce penalties.
How Foreign Residents Can Reduce Their 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.
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.
Frequently Asked Questions
Does Japan audit every person who fails to file a tax return?
No. However, the National Tax Agency actively investigates cases involving significant unreported income.
Can I reduce penalties by filing voluntarily?
In many cases, yes. If you file your tax return voluntarily before the tax office contacts you, the failure-to-file penalty is generally reduced from 10% to 5%.
How far back can the Japanese tax authorities go?
In most cases, the statute of limitations is five years. However, in cases involving intentional tax evasion or other serious misconduct, the Japanese tax authorities may assess taxes for up to seven years.
I recently moved to Japan. Do I still need to file?
Simply having recently moved to Japan does not, by itself, affect your tax filing obligations.
Once you become a tax resident of Japan, you generally have a filing obligation if you earn Japan-source income, such as employment income from working in Japan or rental income from real estate located 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 if it is remitted to Japan.
Our accounting firm regularly assists foreign residents and international business owners with Japanese tax returns, tax audits, and international tax 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.