The search for truth begins with the doubt of all ‘truths’ in which one has previously believed. – Friedrich Nietzsche
Hi, my name is Taisei Koshida, a certified public accountant and tax accountant in Japan.
What do tax officers actually check during a tax audit in Japan?
In my experience, tax officers do not simply look at whether the total profit on a tax return seems reasonable. They examine individual transactions and accounting records to determine whether sales have been omitted, whether revenue and expenses have been recorded in the correct period, and whether personal expenses have been included as business expenses.
In this article, I explain four common areas that tax officers check during a Japanese tax audit:
- Unrecorded sales and revenue
- Sales recorded in the wrong accounting period
- Purchases and expenses recorded too early
- Personal expenses recorded as business expenses
These are basic points, but they can lead to significant tax adjustments if errors are found.
1. Unrecorded Sales and Revenue
One of the first things tax officers may look for is sales or other revenue that has not been recorded.
Tax officers often compare figures from year to year and examine whether certain types of revenue have been recorded consistently. If a particular source of revenue appears in one year but not in another, they may ask why.
Even relatively small sources of income can become an issue.
For example, if a business has vending machines at its office or other locations but the revenue from those machines has not been recorded, tax officers may question why the income is missing from the accounting records.
The important point is that all business revenue should be recorded, even if it does not come from the company’s main business activity.
2. Were Sales Recorded in the Correct Accounting Period?
Tax officers may closely examine bank records, accounting books, invoices, and other sales-related documents from the beginning of an accounting period.
One reason is to determine whether sales recorded in the first month of the current period should actually have been recorded in the previous period.
For example, simply recording revenue when payment is received does not necessarily mean that the revenue has been recorded in the correct accounting period.
This type of timing difference is one of the points that may be checked during a tax audit.
3. Were Purchases and Expenses Recorded in the Correct Period?
Tax officers may also examine purchases and expenses recorded near the end of an accounting period.
They may compare accounting records, invoices, contracts, bank records, and other documents to determine whether expenses recorded in the current period actually belong to the following period.
In other words, tax officers may check both sides of the accounting period:
sales recorded too late can understate income, while purchases or expenses recorded too early can also reduce taxable income for the period.
This is why transactions around the fiscal year-end often receive particular attention.
4. Were Personal Expenses Included as Business Expenses?
Tax officers also check whether expenses recorded by the business are genuinely related to its business activities.
Typical issues include personal travel expenses, restaurant bills, and other costs that may have both business and private elements.
If entertainment expenses are significant, tax officers may ask who attended, the business purpose of the meeting, and how the expense relates to the business.
Occasionally, tax officers may also contact the restaurant or another party involved in the transaction to verify the facts.
For this reason, particularly for entertainment and travel expenses, it is useful to keep records that explain the business purpose instead of relying only on receipts.
For more information about entertainment expenses under Japanese tax law, see:
Entertainment Expenses Under Japanese Tax Law: Points to Pay Attention To
Related Articles on Tax Audits in Japan
If you would like to understand Japanese tax audits in more detail, I also recommend the following articles:
How Tax Audits Work in Japan: What Foreign Business Owners Should Expect
What Is the Worst-Case Scenario in a Japanese Tax Audit?
How Often Does Japan Audit People Who Fail to File Tax Returns? Statistics and Practical Risks
Japan’s Electronic Record Keeping Law: A Practical Guide for Businesses
5. FAQ: What Tax Officers Check in Japan
If money was deposited into my bank account in the following year, can I record the sale in that year?
Not necessarily. The timing of a bank deposit and the timing at which revenue should be recognized for tax purposes are not always the same. Tax officers may examine invoices, contracts, delivery records, and other documents to determine which accounting period the sale belongs to.
Is a receipt enough to prove that an expense is deductible?
Not necessarily. A receipt proves that a payment was made, but the business purpose of the payment is also important. This is particularly relevant for entertainment, travel, and other expenses that could have a personal element.
Can small amounts of unrecorded income become an issue in a tax audit?
Yes. The fact that an amount is small does not by itself make it non-taxable. Tax officers may also look at whether a particular source of income has been consistently recorded.
Why do tax officers look closely at transactions around the fiscal year-end?
Because recording sales or expenses in the wrong accounting period can change taxable income for both periods. Tax officers may therefore examine transactions immediately before and after the fiscal year-end.
Does finding an accounting error mean that the tax office will regard it as tax evasion?
No. An accounting error and intentional disguise or concealment are different issues. If the tax office alleges intentional disguise or concealment, the facts surrounding how the error occurred become particularly important.
For more information on this distinction, see:
What Is the Worst-Case Scenario in a Japanese Tax Audit?
Accounting and Tax Audit Support in Japan
Koshida Accounting and Tax Office provides accounting and tax services in Japan with English support.
We assist foreign entrepreneurs and small business owners with accounting in Japan, Japanese tax filings, and tax audits.
During a tax audit, we can help review accounting records, identify the issues raised by the tax office, prepare supporting documents, and communicate with the tax authorities.
We also provide taxation consulting in Japan for small businesses and professional accounting services for clients who prefer English support.
Please feel free to contact us through the inquiry form.