A tax official asks to see your books. That request has a legal basis: the authority set out in Articles 74-2 through 74-6 of the General Act of National Taxes.Right to inspection and questioningIt is.

Although called a noncompulsory investigation, failure to cooperate carries penalties. This is the key distinction to understand.

Who can do what, and to whom?

Article 74-2(1) provides that, for audits of income tax, corporation tax, local corporation tax, and consumption tax, officials of the National Tax Agency, regional taxation bureaus, tax offices (collectively “the National Tax Agency and related bodies” in the statute), or customs may take the following three actions. Customs officials are limited to consumption tax investigations.

• Ask questions
• Inspect books, documents, and other objects relating to the businessby inspectionas necessary.
• Require those objects to bepresented or submittedfor examination

Because the parenthesis says “including copies,” copies rather than originals may also be requested.

The persons covered are set out in separate items by tax: item (i) for income tax, item (ii) for corporation tax and local corporation tax, and items (iii) and (iv) for consumption tax. Each item is further divided into (a) and (b), and sometimes (c), coveringnot only the taxpayer but also business counterparties.That is the result.

For example, income tax item (i)(c) includes “persons considered to have had an obligation to provide money or goods to a person listed in (a).” Those entitled to receive such payments or goods are also covered, so the authority extends to both suppliers and customers. This is the basis of cross-check audits.

Separate articles govern different taxes: Article 74-3 covers inheritance tax, gift tax, and related matters (specifically audits and collection of inheritance and gift taxes and audits of land value tax); Article 74-4 covers liquor tax; Article 74-5 tobacco tax and similar taxes; and Article 74-6 aviation fuel tax and similar taxes.

“Noncompulsory” yet subject to penalties

What happens if you do not cooperate with questioning or inspection? Article 128(ii) and (iii) of the General Act of National Taxes provides the answer.

Article 130 provides dual liability. If a representative, employee, or similar person commits a violation, both the offender andthe corporation or individual business ownerare subject to punishment, with a fine imposed on the latter. Sole proprietors are also covered.

Thus, “noncompulsory” means there is no warrant and officials cannot forcibly enter; it does not mean you are free to refuse. Taking a confrontational stance based on that misunderstanding can expose you to penalties.

It is not a criminal investigation

Article 74-8 (Interpretation of Authority) provides that questioning and inspection authority “must not be construed as having been granted for criminal investigation.”

This is not merely an exhortation. Questioning and inspection are administrative procedures premised on cooperation and are separate from A tax offense investigation a tax offense investigation, commonly called a criminal tax investigation. Keeping the two distinct is the starting point for responding to an audit.

You can request identification

Article 74-13 requires officials conducting questioning, inspection, or similar measures to carry identification andpresent it upon a relevant person's request.This is the appointment procedure.

It is required upon request. If you say nothing, it may not be shown. Recording who attended can matter in later proceedings.

Submitted objects may be retained

Article 74-7 (Retention of Submitted Objects) provides that objects submitted during an audit “may be retained.” That is the entire provision. The Article itself says nothing about the retention period or return procedure.

If your books are taken away, day-to-day operations can be disrupted. Confirm at the time what will be retained and until when.

Common practical questions

• We often receive concerns about cross-check audits of business partners. There is no right to prevent them, but there may still be room to discuss how the audit proceeds.
• It is meaningful to ask, “Is this an audit or administrative guidance?” The answer affects whether the rules on advance notice and conclusion procedures apply.
• If requested materials appear to exceed the periods or taxes notified in advance, you need to decide at that point whether to challenge or accept the request.

These matters concern what to say to the auditor in front of you and how to say it, as much as knowledge of the statute. Consult us if you are unsure.

Legal basis

• Article 74-2 of the Act on General Rules for National Taxes (Authority to Question and Inspect Concerning Investigation of Income Tax, etc. by the Relevant Official)
• Article 74-3 of the General Act of National Taxes (Officials' Questioning and Inspection Authority for Audits and Related Matters Concerning Inheritance Tax and Other Taxes)
• Article 74-4 of the General Act of National Taxes (Officials' Questioning and Inspection Authority for Audits and Related Matters Concerning Liquor Tax)
• Article 74-5 of the General Act of National Taxes (Officials' Questioning and Inspection Authority for Audits Concerning Tobacco Tax and Other Taxes)
• Article 74-6 of the General Act of National Taxes (Officials' Questioning and Inspection Authority for Investigations Concerning Aviation Fuel Tax and Other Taxes)
• Article 74-7 of the General Act of National Taxes (Retention of Submitted Objects)
• Article 74-8 of the General Act of National Taxes (Interpretation of Authority)
• Article 74-13 of the General Act of National Taxes (Carrying Identification and Related Matters)
• Article 128 of the General Act of National Taxes
• Article 130 of the General Act of National Taxes

Article headings are verified using the statutory data from the e-Gov Law Search.