The Journal The Authority on Global Business in Japan

When we get behind the wheel, we know the rules: don’t drink and drive. We know that there are DUI checkpoints, and should we break the rules we will be caught. But, as individual taxpayers, how do we know where tax checkpoints are set up and what is being checked? Here is an FAQ put together by a certified public tax accountant to serve as a brief guide.

When are foreign nationals selected for tax audits?
The following are scenarios in which the tax return of a foreign national may be flagged:

  1. An international assignee from a foreign parent or affiliate who receives stock options, restricted stock units, or other share-based compensation, but who fails to include this income on their tax return. Employers are required to file an informational return to the tax authority disclosing the nature and value of income recognized by employees through exercise or vesting of share-based compensation.
  2. An individual fails to include on their tax return interest and/or dividends from overseas savings and investment holdings.
  3. An individual fails to include on their tax return income generated overseas when overseas savings, investment holdings, and assets are disclosed on the Overseas Asset Report.
  4. Significant capital gains are recognized from sales of financial assets and/or real estate.
  5. Losses from overseas rental property as a result of significant depreciation, repairs and maintenance, loan interest, and other expenses are offset against employment or other type of income.
  6. Significant wire transfers are reported on the Statement of Overseas Wire Transfers and a need for further investigation arises.

How are tax audits conducted?
The tax authority will call to inform you that you have been selected for audit and to schedule an appointment. Individuals are statutorily obligated to comply. However, individuals may request to reschedule the tax audit due to prior work or personal commitment. If the request is reasonable, tax auditors will generally agree.

The first day of the tax audit will generally begin with questions about your biography and work. You will also be asked to present—and in most cases submit—documents supporting the content of your past tax returns. If you have a certified public tax accountant, the audit may be conducted without requiring your presence. If the tax auditors feel it necessary, they may contact banks, related companies, and other third parties.

Within one to two months from the date of submitting the requested documents, the tax auditors will explain their findings to you. It may take longer depending on the situation. If an error is found on your tax return, and you agree, you may file an amended return. If you disagree, you may explain to the tax auditors where you disagree, and if the tax auditors do not agree with your claim they will issue a notice of correction. You may then file a motion of complaint against the National Tax Tribunal. If you disagree with their conclusion, you may file a lawsuit.

What is most important when under audit?
When requested to present and submit documents under a tax audit, it is important to be cooperative. Noncooperation will prolong the tax audit, which may adversely affect your job. If you disagree with the content of the tax audit, be honest, raise questions, and request an explanation until you are satisfied. Lastly, it is important to engage a tax professional to determine whether the tax auditors’ claims are correct and to be present at the audit to look after your interest.

For more information, please contact your Grant Thornton representative at +81 (0)3 5770 8829 or email us at tax-info@jp.gt.com

Yukiteru Abe is a director at Grant Thornton Japan’s Global Mobility Services, providing tax solutions to globally mobile employees, global businesses, and high-net-worth individuals with overseas assets. Yukiteru was an auditor, investigator, and tax consultant at the Tokyo Regional Taxation Bureau for 38 years before joining Grant Thornton. www.grantthornton.jp/en