When a Tax Audit Notice Arrives: What You Can Refuse, and What You Can Protect

Monday morning, a call from the tax office: "We would like to review your company's situation — may we arrange a time?" Business owners living in Japan come to us with this exact scenario again and again. The first instinct is usually "Can I refuse?" or "Can I stay silent?" But the prior question is structural: which kind of investigation are you actually facing?

Voluntary and Compulsory Audits Are Not the Same

Japanese tax audits fall into two legally distinct categories.

The first is the voluntary audit (任意調査). Under the power of inquiry and inspection set out in Articles 74-2 through 74-6 of the Act on General Rules for National Taxes, the relevant officials may question a taxpayer and inspect their books and records. The vast majority of audits in practice are of this type. Crucially, before an on-site audit the office must, as a rule, give advance notice of the date, location, and the taxes covered (Article 74-9).

The second is the compulsory audit (強制調査) — a criminal-investigation procedure conducted under a judge's warrant, reserved for suspected serious evasion and extremely rare. This article addresses the former.

"Voluntary" — but You Cannot Refuse

"Voluntary" does not mean you are free to decline. Failing without justifiable grounds to respond to questioning, or refusing, obstructing, or evading inspection, carries imprisonment of up to one year or a fine of up to ¥500,000 (Article 128). Refusing to produce your books can fall within this penalty.

Even so, taxpayers retain procedural protections:

• Schedule adjustment — if the noticed date is inconvenient, you may seek a reasonable adjustment (consistent with the advance-notice regime of Article 74-9).
• Attendance of a tax accountant — you may engage a licensed tax accountant to attend and handle the audit on your behalf (tax-agent representation under the Certified Public Tax Accountant Act). In practice we strongly recommend it.
• No compelled self-incrimination — Article 38 of the Constitution provides that no person shall be compelled to testify against themselves. But a tax audit is an administrative, not criminal, proceeding, so this protection is construed narrowly here — it does not relieve you of the duty to produce your books.

What the Examiner Is Looking For

In our experience, three areas draw the most scrutiny. First, unreported cash income — cash-heavy businesses are structurally more exposed. Second, personal spending booked as business expense — examiners check line by line whether household costs have crept into corporate expenses. Third, related-party transactions — the commercial rationale of dealings routed through multiple entities.

The single most important rule: do not give explanations that depart from the facts. Where a filing is found to rest on concealment or disguise, a heavy additional tax applies — 35% in lieu of the under-reporting penalty, 40% in lieu of the non-filing penalty (Article 68). Saying "let me confirm and get back to you" about something you don't recall is in an entirely different risk class from misstating a fact.

Treat It as a Structural Question

A tax audit is not a trial; it is a test of the bookkeeping and documentation you maintained in ordinary times. When we help clients prepare, we start from three checks:

• Are the books and supporting documents in a form that can withstand the examiner's questions?
• Can the line between personal and business spending be explained to a third party?
• Do related-party transactions have a defensible business rationale?

Audit readiness is not something you begin when the notice arrives — it should already be built into how you keep your books in normal times.

This article provides general information on tax systems and does not constitute individual tax consultation. Specific filings and tax computations are handled by licensed partner tax accountants whom we introduce.