Sales income had not made it into the tax return. On that bare fact the two cases below are identical — yet one drew Japan's heaviest penalty tax and the other had that same penalty overturned. The first paid roughly ¥27 million in back tax. In the second, the penalty imposed by the tax office was struck down by the National Tax Tribunal. What separated them was not the amount, and not how bad it looked. It was a single document created during the audit itself. This is the first instalment of Tax Audit Files, reading two officially published cases side by side to find where the line actually falls.
Case A: the expense records were kept, only the sales records were destroyed
First, from the National Tax Agency's published audit examples — a side-business reseller who had filed nothing.
The taxpayer had employment income and, separately, income from reselling game consoles, smartphones and similar goods. Various information sources suggested income beyond wages, yet no income tax return had been filed, so an audit was opened.
During the audit the taxpayer stated that there was resale income which had not been declared. The examiner obtained, from the taxpayer's computer and smartphone, recent correspondence with counterparties and invoice data.
Checking how older records had been kept then produced the decisive fact. Documents relating to expenses had been retained, in the belief that they "might be needed when filing" — while every document relating to sales had been destroyed.
With no sales records left, the income was established through cross-checks with the counterparties. The taxpayer also turned out to be a taxable person for consumption tax, so that was assessed too. And the destruction of the documents was treated as an act of concealment, triggering the heavy additional tax.
Note what was destroyed: only the sales records. The expense records were kept because they "might be needed at filing time." In other words, this person sorted the paperwork. That single fact carries a great deal of weight later on.
Case B: the same missing sales, and the penalty was overturned
A company dealing in second-hand goods, incorporated in 2018, with a single director. Sales proceeds had been paid into three bank accounts in the company's name — and those receipts never appeared in the general ledger.
Following the audit, the company filed amended returns for corporation tax, local corporation tax and consumption tax on 7 June 2024. To this point the facts mirror Case A.
About three weeks later, on 26 June 2024, the tax office imposed the heavy additional tax on the basis that concealment had occurred. The company disputed this — there was no concealment or disguise, merely negligence — and filed a request for review on 24 September 2024.
Its explanation: the director had been too busy and had forgotten to enter the journal entries; his brother, an employee, had not passed on part of the transaction statements; and there had been a breakdown in the checking process with the accounting firm's staff.
Exactly one year later, on 24 September 2025, the National Tax Tribunal cancelled the heavy additional tax. The unreported sales themselves stood — but ordinary additional tax was sufficient for them.
The dividing line is neither the amount nor the impression of bad faith
Article 68 of the Act on General Rules for National Taxes imposes the heavy additional tax where a return was filed on the basis of facts that were concealed or disguised. The decision sets out what those two words mean.
The interpretation applied in the decision
"Concealed" means hiding, or intentionally omitting, facts forming the basis for calculating the tax base or tax amount.
"Disguised" means distorting facts intentionally — for instance presenting income, assets or the name in which a transaction is held as though it were the truth.
Both turn on intent. Unreported sales alone therefore do not trigger the heavy additional tax: the omission must also have been deliberate. And since intent is invisible, it has to be proved through conduct.
Case A: why intent was found
Expense records were kept because they "might be needed at filing time"; only the sales records were picked out and destroyed. That act of sorting was itself read as evidence of an intention to keep the sales out of the return. Destroying documents is not sloppy record-keeping — it is a positive act.
Case B: why intent was not found
The passbooks and transaction statements were found to have actually reached the accounting firm, and journal entries were made not only by the director but also by the firm's staff. The tax accountant himself told the tribunal that the material needed to record the sales correctly had been supplied, and that a staff member may simply have failed to reflect it in the return.
Case A left traces of moving to hide something. Case B left only traces of material that was handed over and then dropped along the way. What separated them was whether specific conduct evidencing intent existed.
The decisive item was one document made during the audit
The tax office's evidence for concealment in Case B was a record of questions and answers (shitsumon-ōtō kirokusho). On 25 March 2024 the examiner questioned the director under the inspection power in Article 74-2 of the Act on General Rules for National Taxes and recorded the substance of the exchange. This is what it contained.
The statement as recorded
"It is not that I deliberately decided not to record the sales, but … it cannot be helped if it looks as though I randomly left sales unrecorded. The reason I did not record them as sales was that I thought a large amount of tax would arise, and I did not record them in order to hold down the tax payable."
Read it again. The first half denies intent. The second half asserts it. One statement, saying opposite things.
The tribunal treated this as follows: content denying intent was recorded, and immediately after it content affirming intent — plainly contradictory material, which in itself casts doubt on the statement's credibility. It further noted that nothing had been recorded about how the statement had developed or why it changed, and concluded that it was highly doubtful the director had in fact said the part affirming intent.
The record was therefore not accepted as evidence. The tribunal then found that apart from that record there was no evidence supporting intent. The entire penalty had rested on this one document.
The case turned because the record had been made with a contradiction in it. Conversely, had it recorded only "I did not record them in order to hold down the tax payable", cleanly, and had that been signed, the outcome would very likely have been different. This decision is not about penalties being reversible on appeal. It is about a record made during the audit determining the tax bill afterwards.
What the record of questions and answers actually is
| Item | Detail |
|---|---|
| Who writes it | The examiner. Not the taxpayer |
| Basis of the questioning | The inspection power under Article 74-2 and following |
| Statutory basis of the document itself | The Act contains no provision for a "record of questions and answers", and none requiring the taxpayer to sign one |
| Function | Preserving what was said as evidence; used to support penalties and corrections |
| Where it bites | In a review or litigation, it becomes the authorities' principal evidence that intent existed |
Refusing without proper reason to produce books and records carries a penalty (Article 128). Signing this record is different in kind: no provision requires it.
Read the whole thing yourself rather than having it read aloud to you. Three checks:
- Does it contain things you did not say? Summarising can turn nuance into assertion.
- Do the first and second halves contradict each other? That is exactly where Case B was fought.
- Can you ask for a correction and have it made on the spot? Point to the specific wording. Signing an uncorrected version makes it evidence.
You may decline to sign. But declining is not in itself an advantage — the record is prepared either way. Getting the content right matters more than whether you sign.
This is not a story about appeals succeeding
- Cases where the taxpayer's claim was upheld in whole or in part: 693 (171 in full, 522 in part)
- Success rate: 17.9%
More than eight in ten fail. Case B is in the minority. It also took a year from the request to the decision, during which the disputed tax must be paid or formally deferred.
Nor does cancelling the penalty erase the tax. In Case B the heavy additional tax was simply replaced by the ordinary additional tax; the principal tax and delinquency tax remained. What was cancelled was only the excess over the ordinary rate.
There is also a deadline: a request for re-investigation to the district director, or a request for review to the tribunal, must be filed within three months of the day after notice of the disposition. Miss it and the dispute is closed. See how audits actually work and coming back from non-filing.
What the two cases leave you with
| Common assumption | What these cases show |
|---|---|
| Unreported sales mean the heavy additional tax | The penalty requires intent (concealment or disguise). An omission alone does not meet it |
| Bigger amounts mean the heavy penalty | Case B had it cancelled. Conduct decides, not size |
| Throwing away paperwork is just untidiness | In Case A, destroying only the sales records was treated as concealment |
| What you say during an audit leaves no trace | It is written up and becomes the principal evidence later |
| Just sign it and move on | Case B turned on a contradiction in that document |
One last look at Case A. That taxpayer kept the expense records because they "might be needed at filing time" — which reads like someone who intended to file. It made no difference. Discarding the sales side was enough. How you keep your paperwork speaks about intent more loudly than you would expect.
FAQ
Q. If unreported sales are found, is the heavy additional tax automatic?
A. No. Article 68 imposes it where a return was filed on the basis of concealed or disguised facts. "Concealed" means hiding or intentionally omitting facts; "disguised" means intentionally distorting them. Both require intent. An omission alone does not meet the test, and ordinary additional tax for understatement or for failure to file applies instead.
Q. Must I sign the record of questions and answers?
A. The Act provides for the inspection power under Article 74-2 and following, but contains no provision for this document or any requirement to sign it. That differs in kind from refusing to produce books and records without proper reason, which carries a penalty. Note that the record is prepared whether or not you sign, so checking that its content matches what you actually said matters more than the signature.
Q. What should I check before signing?
A. Three things: whether it contains anything you did not say; whether the first and second halves contradict each other; and whether you can point to specific wording and have it corrected on the spot. In the published decision, content denying intent was immediately followed by content affirming it, and the tribunal rejected the record's credibility on that basis.
Q. Can destroying documents alone amount to concealment?
A. In the published audit example, expense documents were retained in the belief they might be needed at filing time while all sales documents were destroyed, and that destruction was treated as concealment, triggering the heavy additional tax. The point was not untidy filing but that the sales side alone had been singled out for disposal.
Q. If I dispute the penalty, will it be cancelled?
A. There is no guarantee. In FY2024, 693 requests for review were upheld in whole or in part (171 fully, 522 partly), a success rate of 17.9 percent — more than eight in ten failed. A request for re-investigation or for review must be filed within three months of the day after notice of the disposition.
Q. If the heavy additional tax is cancelled, do I get the money back?
A. Not all of it. What was cancelled in the published decision was only the part of the heavy additional tax exceeding the ordinary additional tax for understatement or for failure to file. The unreported sales themselves stood, so the principal tax, delinquency tax and ordinary additional tax remained. The penalty was replaced, not erased.
Sources
Both cases come from material anonymised and published by public bodies. Tribunal decisions are outside the scope of copyright under Article 13(iii) of the Copyright Act, and the tribunal's website content follows the Public Data Terms of Use (version 1.0). National Tax Agency press material is used as explanatory material under Article 32(2).
This article is general information and recommends no particular course of action. Whether the requirements for the heavy additional tax are met depends on the facts of each case. Consult a tax office or a licensed tax accountant. A tribunal decision concerns one case and does not guarantee the same outcome elsewhere.