Common Tax Errors That Trigger IRAS Audits in SMEs
Many SMEs assume that IRAS audits only happen to large companies or deliberate tax evaders. In practice, this is far from true. A significant number of IRAS audits in SMEs are triggered by basic, recurring tax errors, not aggressive planning.
Most of these issues arise from poor documentation, inconsistent reporting, or misunderstanding tax rules — rather than intentional wrongdoing. Unfortunately, once flagged, audits consume time, management attention, and often lead to back-dated adjustments and penalties.
This article explains the most common tax errors that trigger IRAS audits in SMEs, and what business owners should watch out for.
How IRAS Typically Selects SMEs for Audit
Inland Revenue Authority of Singapore uses a combination of:
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Data analytics
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Industry benchmarks
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Trend analysis
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Third-party information
IRAS does not audit randomly. Instead, it looks for anomalies, inconsistencies, and repeated patterns that suggest higher risk.
Common Tax Errors That Trigger IRAS Audits
1️⃣ Large Gaps Between Revenue and Expenses (Without Explanation)
SMEs are often flagged when:
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Expenses spike sharply year-on-year
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Margins fall below industry norms
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Revenue remains flat while costs increase
While these may be legitimate, poor explanations or weak documentation increase audit risk.
IRAS expects:
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Clear business rationale
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Supporting schedules
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Consistent accounting treatment
Unexplained fluctuations attract attention.
2️⃣ Claiming Non-Deductible Expenses as Tax Deductions
One of the most common triggers is incorrect expense deductibility.
Examples include:
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Private expenses charged to the company
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Fines and penalties claimed as deductions
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Capital items expensed instead of capitalised
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Entertainment expenses without proper support
These errors are common in SMEs and often picked up during desk reviews.
3️⃣ Inconsistent Reporting Between ECI and Final Tax Computation
IRAS frequently compares:
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Estimated Chargeable Income (ECI)
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Final tax computation
Significant differences — without proper explanation — raise red flags.
Common causes include:
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Audit adjustments not properly tracked
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Timing differences not explained
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Errors discovered only at finalisation
SMEs should be prepared to clearly reconcile ECI to final tax figures.
4️⃣ Director Remuneration and Shareholder Transactions
Transactions involving directors and shareholders receive heightened scrutiny.
Common issues include:
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Director’s fees not approved properly
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Loans to directors without repayment terms
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Informal reimbursements
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Related party transactions without documentation
IRAS views these areas as higher risk due to potential tax leakage.
5️⃣ Excessive or Poorly Supported Expense Claims
SMEs often face issues with:
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Travel and accommodation claims
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Marketing and advertising expenses
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Consultancy fees paid to related parties
IRAS expects:
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Commercial rationale
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Supporting invoices
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Arm’s length pricing
Missing or weak documentation increases audit likelihood.
6️⃣ GST Errors (Where Applicable)
For GST-registered SMEs, common audit triggers include:
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Claiming input GST on non-allowable expenses
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Incorrect GST treatment of overseas services
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Late or inconsistent GST filings
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Errors in output tax reporting
GST audits are often transaction-based and detailed, making errors costly.
7️⃣ Persistent Loss-Making With No Clear Commercial Reason
SMEs that report losses year after year may be reviewed to assess:
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Whether expenses are genuine
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Whether income is understated
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Whether the business is commercially viable
Losses alone do not trigger audits — unexplained or inconsistent losses do.
8️⃣ Poor Record-Keeping and Missing Documentation
Even when numbers are correct, poor documentation increases audit risk.
Common weaknesses include:
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Missing invoices
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Unreconciled bank balances
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Incomplete schedules
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Weak explanations
IRAS places strong emphasis on record-keeping discipline, not just outcomes.
9️⃣ Industry Benchmark Outliers
IRAS benchmarks SMEs by:
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Industry
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Size
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Activity profile
When a company’s:
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Margins
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Expense ratios
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Effective tax rate
deviate significantly without explanation, review is more likely.
10️⃣ Repeated Errors Across Multiple Years
One-off mistakes may be corrected quietly.
However, repeated errors across years signal systemic issues and increase the likelihood of a full audit rather than a simple clarification request.
What Happens After IRAS Flags an SME
Once selected, IRAS may:
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Request documents
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Issue clarification letters
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Conduct desk or field audits
If errors are found, outcomes may include:
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Back-dated tax adjustments
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Penalties and interest
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Extended review periods
Early cooperation and clear explanations often reduce escalation.
How SMEs Can Reduce IRAS Audit Risk
SMEs should focus on:
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Accurate classification of expenses
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Proper documentation and record-keeping
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Clear reconciliation between ECI and final tax
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Early review of director and related party transactions
Pre-emptive reviews often cost far less than audit remediation.
A Simple SME Self-Check
Ask yourself:
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Can we explain major year-on-year changes?
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Are director transactions clean and documented?
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Do our expense claims align with tax rules?
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Are GST treatments correct and consistent?
If any answer is unclear, audit risk exists.
Final Thoughts
Most IRAS audits in SMEs are triggered by avoidable tax errors, not aggressive planning. Inconsistent reporting, weak documentation, and misunderstandings are far more common causes than deliberate non-compliance.
SMEs that invest in basic tax discipline significantly reduce audit risk — and stress.
How uSafe Can Help
uSafe supports SMEs with:
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Pre-IRAS audit tax health checks
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ECI and tax computation reconciliation
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GST and expense deductibility reviews
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Audit support and IRAS correspondence
If you are unsure whether your tax position would withstand scrutiny, addressing issues early is always cheaper than fixing them later.
Sources: https://www.iras.gov.sg/
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