When someone who filed a tax return on time later files an amended return or receives a reassessment from the tax office, additional tax for understatement may be imposed separately from the principal tax. This is provided for in Article 65 of the Act on General Rules for National Taxes.

This article serves as a map to estimate the financial burden before deciding whether to file an amended tax return.

Applies to taxpayers who filed on time

The additional tax for understatement is imposed when a return has been filed within the statutory time limit, and a revised return is subsequently filed or a correction is made. The return filed within the statutory time limit also includes a tax refund claim form.

If nothing was filed by the deadline, you enter the realm of the additional tax for failure to file, rather than this one. However, Article 65 contains a parenthetical provision stating, "including cases where a post-deadline tax return is filed and the provisions of the proviso to paragraph 1 of the following article or paragraph 9 apply." This establishes the connection that a post-deadline tax return exempt from the additional tax for failure to file is treated the same as a timely filed return on the side of the additional tax for understatement.

The rate is 10%, or 5% if a reassessment was not anticipated

The basic rate is 10% of the tax amount due based on an amended return or a tax assessment.

The rate may fall to 5%. The provision states: “when the amended return was not filed in anticipation of a reassessment of the national tax concerned as a result of an investigation of that tax.” The dividing line is whether a reassessment was anticipated, not whether an investigation had begun.

If it is before the "Notice of Investigation", it is not imposed in the first place.

There is an earlier stage still. Article 65 does not apply to an amended return filed without anticipating a reassessment and before notice of an audit. The additional tax is zero.

An audit notice refers to the notification of the matters listed in Article 74-9, Paragraph 1, Items 4 and 5, as well as other matters specified by Cabinet Order. The turning point is when you are contacted that an on-site audit will be conducted and are informed of the target tax item and taxable period.

Thus, even a “voluntary amended return” falls into one of three stages: zero before audit notification, 5% after notification but before a reassessment is anticipated, and 10% after a reassessment is anticipated.

Add 5% to the amount exceeding 500,000 yen.

Article 65, Paragraph 2 provides for an increased rate. If the tax payable exceeds the greater of the amount declared in the timely return for that national tax and 500,000 yen, an additional 5% applies to the excess.

A key feature is that instead of a fixed standard of 500,000 yen, the comparison is made against the tax amount originally declared within the filing deadline. The design makes it less likely for companies with larger tax amounts declared on time to be subject to the increased tax. If an amended return has already been filed or a reassessment has been made once before, the cumulative increased tax amount is added for the determination. The definitions of the terms are provided in paragraph 3 of the same Article.

Increased penalties for failing to produce books

Article 65, Paragraph 4 provides for increased penalties concerning books of account. It applies where a relevant tax official requested presentation or submission of the books before an amended return or similar action. An additional 10% applies if the books were not produced, or if entries for matters specified by Ministry of Finance Ordinance as essential to preparing the return (“specified matters”) were grossly insufficient. An additional 5% applies if those entries were insufficient. However, cases “where there are no grounds attributable to the taxpayer” are excluded.

The applicable account books are limited to those specified by Ministry of Finance Ordinance, which also includes creation and retention in the form of electromagnetic records. Since the additional tax is a provision that reacts to how documents are presented in the first place, it takes effect during the initial stages of an audit.

The part deemed to have a legitimate reason is excluded.

Article 65, Paragraph 5 specifies amounts excluded from the calculation base. One is tax attributable to facts for which there is a justifiable reason why they were not included in the calculation of tax before the amendment or reassessment. The other is tax up to the amount in the timely return where a reassessment reduced the tax payable under that return, excluding a reassessment based on a taxpayer’s request for correction.

A "justifiable reason" is a statutory requirement, and it serves as an entry point for taxpayers to argue and have it accepted.

When liability arises and the minimum amount charged

Liability for additional tax for understatement arises when the statutory filing deadline passes (Article 15), not when an amended return is filed. However, the same article provides that “for national taxes specified by Cabinet Order, at the time specified by Cabinet Order.” For a return claiming a refund, Article 5 of the Enforcement Order of the Act on General Rules for National Taxes provides that liability arises when the return is filed.

Fractions of the amount are rounded down pursuant to Articles 118 and 119. The tax amount serving as the basis for calculation is rounded down to the nearest 10,000 yen, the finalized additional tax amount is rounded down to the nearest 100 yen, and if the total amount of additional tax is less than 5,000 yen, the entire amount is rounded down. When the increase in the principal tax is small, no additional tax may be assessed.

The tax item is the same as the main tax (Article 69).

Common practical questions

Uncertainty arises when you realize an error after receiving notification of an audit. Whether the amount is 5% or 10% depends on the assessment of “foresight,” which is a matter of fact-finding. If you consult with us before filing an amended return, we can help you determine which facts are relevant to the assessment of foresight.

For the broader framework, see our overview of ancillary taxes.

Legal basis

• Article 2, Item 4 of the Act on General Rules for National Taxes (Definitions)
• Article 15, Paragraph 2, Item 14 of the Act on General Rules for National Taxes (Establishment of Tax Liability and Determination of Amount of Tax Payable)
• Article 65, Paragraphs 1 through 6 of the Act on General Rules for National Taxes (Additional Tax for Understatement)
• Article 69 of the Act on General Rules for National Taxes (Tax Items Subject to Additional Taxes)
• Article 118, Paragraph 3 of the Act on General Rules for National Taxes (Rounding of Fractional Numbers for Tax Bases of National Taxes, etc.)
• Article 119, Paragraph 4 of the Act on General Rules for National Taxes (Rounding of Fractional Amounts of Established National Tax, etc.)
• Article 5, Paragraph 1, Item 11 of the Order for Enforcement of the Act on General Rules for National Taxes (Special Provisions on the Timing of Establishment of Tax Liability)

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