Targeted Audits: Non-Submission of Annual Tax Returns

By: Wisnu Saka Saputra, the Directorate General of Taxes officer

Tax compliance is a behavior where taxpayers fulfill all tax obligations and exercise their tax rights. There are two types of compliance: formal compliance and material compliance. Formal compliance is a behavior in which taxpayers strive to fulfill tax obligations formally according to formal provisions in tax laws. Material compliance is a behavior in which taxpayers substantively fulfill all material tax provisions in accordance with the content and spirit of tax laws.

One of the indicators of formal tax compliance is the submission of tax reports through the Annual Tax Return. Director General of Taxation, Suryo Utomo, revealed that formal compliance achievement has increased compared to 2022, which reached 86.8 percent. The formal compliance ratio is a comparison between the number of annual income tax returns received by the Directorate General of Taxes in a particular tax year and the number of registered taxpayers required to submit annual tax returns.

The formal compliance ratio has fluctuated over the past five years. The formal compliance ratio for the submission of annual tax returns in 2017 was recorded at 72.58 percent and decreased in 2018 to 71.10 percent. In 2019, it rose again to 73.06 percent, then increased to 77.63 percent in 2020, and rose to 84.07 percent in 2021.

Rozie (2005) concluded in his research that tax audits would encourage taxpayer compliance. This audit action is carried out as a legal enforcement tool for taxpayers who neglect their tax obligations and is one of the important steps in securing and increasing state revenues from the tax sector.

The selection of taxpayers is one of the important instructions in tax audit activities. In order to prioritize taxpayer selection more objectively and accurately to produce better audit products in terms of tax potential, Circular Letter SE-15/PJ/2018 was issued on August 13, 2018. This Circular Letter sharpens audits to be carried out on taxpayers who have high non-compliance indicators, including those who fail to submit tax returns.

With this circular letter, it is expected that taxpayers who are less compliant in tax matters can be identified so that they will be included in the priority target list for tax potential exploration. Taxpayers with non-compliance payments and submissions of tax return indicators will be included in this priority target list.

Taxpayer Audit

A tax audit is a series of activities to collect and process data, information, and/or evidence objectively and professionally based on an audit standard to test compliance with tax obligations and/or for other purposes in implementing tax regulations.

The authority of the Director General of Taxes to conduct audits is clearly regulated in Article 29 of the Tax Administration Law (KUP). Audit actions are carried out by the Director General of Taxes to test compliance with tax obligations and for other purposes in implementing tax regulations.

The objectives of audits include testing compliance with tax obligations and/or other purposes in implementing tax regulations. To achieve these objectives, the output of an audit is evidence, from which, with that evidence, compliance with tax obligations or other purposes can be determined.

Evidence is the basis for issuing a tax assessment letter, as stated in Article 12 paragraph 3 of the Tax Administration Law. Without evidence, there is no legal basis for the tax authorities to correct the tax owed on the tax return and issue a tax assessment letter. There are no regulations specifying what evidence can be used as the basis for issuing such a tax assessment letter.

Based on Article 4 paragraph 1 letter h of Minister of Finance Regulation Number 18/PMK.03/2021 regarding Audit Procedures, audits to test compliance with tax obligations are carried out when meeting certain criteria, one of which is when a taxpayer fails to submit or submits a notification letter but exceeds the time limit set in the warning letter selected for audit based on risk analysis.

Tax Audit Variables

Firstly, a high non-compliance indicator. Non-compliance indications consider material non-compliance indications, namely the gap between the tax profile (profile based on the tax return) and the actual economic profile. One of the indicators of taxpayer non-compliance, both for individual taxpayers and corporate taxpayers, is non-compliance with payment and submission of tax returns.

Secondly, tax payer non-compliance modus infringement. The Directorate General of Taxes identifies taxpayers who are indicated to have certain modes of non-compliance. The identification of non-compliance modes is intended to assist tax examiners in determining the scope and depth of audits, thus facilitating the creation and establishment of audit plans, audit programs, and documents to be borrowed and examined.

Thirdly, identification of tax potential value Priority taxpayers are those with a large tax potential. The potential value must be calculated in Indonesian Rupiah in accordance with taxpayer non-compliance indicators by multiplying the tax rate by the non-compliance indication.

Fourthly, identification of taxpayers ability to pay tax assessments Identification can be done by identifying the sustainability of the taxpayer's business and assets owned based on the tax return, the existence of the taxpayer's business, and the taxpayer's known guarantor.

Audits of taxpayers who do not submit tax returns can be an option to simultaneously increase formal compliance and taxpayer material compliance. Audit actions are carried out as a legal enforcement tool for taxpayers or guarantors who neglect their tax obligations and are one of the important steps in securing and increasing state revenues from the tax sector.

*)This article represents the author's personal views and does not represent the stance of the institution.

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