Audit probability, red flags, and the audit process

Sole proprietors can also be selected for a tax audit; per an estimate from the chat, roughly 1 in 100-200 is chosen. Red flags that raise the odds of being selected include: undeclared income that a counterparty declared as an expense; mismatches between bank transactions and the declared return; large cash sales or spending with no paper trail; new or wide-ranging types of activity; income above 10 million yen; a sharp income increase; income sitting right at the 10 million yen mark (suspected consumption-tax avoidance); a late or missing return; filing a return without a 税理士 (raises risk); filing on the blue form (paradoxically increases audit risk); and an audit at a client's or partner's business. A sharp drop in profit is also a potential trigger. An informal threshold for a higher audit probability is around 30 million yen in turnover (the point where an audit becomes cost-effective for the tax office) and/or a company age of 7+ years — according to a former tax official, unconfirmed. There are two types of audits: 任意調査 (voluntary, with a scheduled date — formally refusable, but almost never in practice) and 強制調査 (forced, arriving unannounced; refusing entry can bring the police and a criminal case). Advice from the chat: a 税理士 can be hired specifically for the audit, and when a date is being set, it is worth trying to push it as far out as possible. An audit typically takes 1-2 days, most often 1 day for a sole proprietor; the years examined are usually the last 3-5 for a sole proprietor and up to 10 for a company.