Japan’s National Tax Agency to Launch AI-Powered KSK2 in September—Who’s Most Likely to Be Flagged?

According to the National Tax Agency’s income tax audit results released at the end of last year, additional tax assessments reached a record-high ¥143.1 billion. The agency says this was the result of improved audit efficiency through the use of AI.

In addition to AI, the National Tax Agency’s core system, KSK2, will begin full-scale operation on September 24 this year. Its targets are not limited to unscrupulous businesses attempting tax evasion. Even a few tens of thousands of yen earned on Mercari, YouTube advertising revenue, or a little income from part-time work at night could come under scrutiny. Those who think, “It’s only a small amount, so it’s fine,” or “It’s all paid in cash, so they won’t find out,” may be in for a rude awakening.

We spoke with Shinya Yamada, the otaku accountant whose YouTube channel boasts approximately 1.17 million subscribers.

The three types of people AI audits are targeting

KSK2 is the National Tax Agency’s comprehensive tax management system—a massive database used by tax offices. It replaces the previous system that had been in operation since 2002, consolidating information on income tax, corporate tax, consumption tax, and other taxes into a single platform.

By combining KSK2 with AI, the accuracy of tax audits is expected to improve significantly, and the likelihood of receiving inquiries or being selected for a tax audit is also expected to increase.

According to Yamada, there are three types of occupations that are particularly likely to attract attention.

“People whose business activities are easily visible on social media, people earning income through overseas platforms, and people who receive a lot of cash income should be especially careful.”

The first category—people whose activities are easily visible on social media—refers to those who publicly share their business activities or personal lives online. This includes influencers, independent salon owners such as hairstylists and nail technicians, and freelance consultants.

So who exactly falls into the category of people earning income from overseas platforms?

“People making money through YouTube, TikTok, X, and similar platforms. Since the payments come from overseas corporations, there’s no automatic system like there is with Japanese companies, where a payment report—a document informing the National Tax Agency who was paid and how much—is submitted. Because of that, many people assume, ‘The tax office probably doesn’t know about it,’ and end up neglecting to report the income. That’s a major misconception.

Income from overseas is ultimately transferred into a Japanese bank account. KSK2 can cross-reference overseas remittance data received by domestic bank accounts with the figures reported on tax returns. The era of thinking, ‘It’s an overseas transaction, so they won’t find out,’ is over. If anything, people should assume that because it’s an overseas transaction, AI is monitoring it even more closely.”

The third category consists of occupations that receive a large amount of cash income. This includes cabaret club owners, hostesses and hosts, animal breeders, and even people earning money through “papakatsu” (compensated dating).

According to the National Tax Agency’s latest audit results (Status of Income Tax Audits), the industry with the highest amount of unreported income was cabaret club owners, with an average of ¥41.64 million in unreported income per audited case. (For reference, hostesses and hosts, including cabaret club hostesses, ranked third, with an average of ¥29.68 million in unreported income.)

“Most people know that if you earn ¥200,000 or more in annual miscellaneous income, you generally need to file a tax return. Income earned through ‘papakatsu’ also falls under miscellaneous income. People tend to think no one will ever find out, but in some cases it comes to light because of information provided by a friend or by the ‘papa’ involved when some kind of dispute arises.”

Although the routes by which unreported income is discovered differ from case to case, Yamada says the common thread is that omissions which previously went unnoticed are now much more likely to be uncovered.

“Until now, audit targets were largely selected based on the experience and intuition of tax officials, so quite a few people slipped through the cracks. AI has now taken over much of that role. As a result, people who previously escaped notice are far more likely to become audit targets going forward.”

Why does it get discovered? The reality of KSK2

So what exactly does it mean that the accuracy of AI will improve with the launch of KSK2?

“It appears that KSK2 uses AI in the process of selecting targets for tax audits. The previous system, KSK, was a database where tax officials accessed information and manually conducted investigations. However, AI was introduced around fiscal 2022, and the work reportedly became significantly easier. The discrepancies in tax filings that tax officials previously noticed through experience and intuition can now be identified accurately by AI through the analysis of massive amounts of data.”

An even bigger change is the elimination of departmental silos.

“Until now, income tax, corporate tax, and consumption tax were managed by separate systems, meaning officials had to extract and check data from each system individually when necessary. Going forward, everything will be viewable on a single screen. It may seem like a minor change, but removing these divisions will greatly improve the efficiency of their work.”

This change could also bring benefits to taxpayers.

For example, if someone receives compensation from an overseas client, those overseas transactions are exempt from consumption tax, meaning they are not counted as sales on consumption tax filings. As a result, sales may appear lower if officials look only at the consumption tax return. However, when it is checked together with the income tax return, it becomes clear that the reason is the existence of overseas transactions.

Under the previous fragmented system, there were reportedly many cases where officials failed to notice this connection and unnecessary audits were conducted.

“If you file your tax return properly, unnecessary audits will decrease. For people who are doing everything correctly, the arrival of KSK2 is actually a benefit.”

“It’s under ¥200,000, so I’m safe” is the most dangerous assumption

If you file your tax return properly, there is nothing to fear. However, there is also a trap in the common belief among salaried workers that side income under ¥200,000 doesn’t need to be reported.

“There is a rule that if your income from side work is ¥200,000 or less, you do not need to file an income tax return. In the first place, this rule was created because tax offices were understaffed and unable to handle all cases. Now that AI adoption is progressing, it would not be surprising if there were discussions about whether this exemption rule is still necessary.

Also, it has long been said that white tax returns are less likely to be audited, but since AI will now select audit targets, it can be expected that whether someone files a white or blue tax return will no longer matter—if there is a discrepancy, they may become a target. At this point, there have been no official announcements regarding these matters, but it is certainly possible that such changes could come in the future.”

So how does contact from the tax office actually arrive?

“If the discrepancy is in the range of several hundred thousand yen, they will make a simple inquiry, meaning a letter known as an inquiry (otoiawase) will arrive. If you ignore it, it can develop into a full-scale tax audit. If you file an amended return immediately after receiving the inquiry, there is generally no problem.”

An inquiry is merely a basic confirmation process; if there is a serious issue, a tax audit will usually be initiated from the beginning. There is no need to panic if an inquiry arrives, but ignoring it is something you should absolutely avoid.

Furthermore, the range of data accessible to tax authorities is becoming broader than many people realize. In addition to bank accounts, systems are increasingly being established that allow tax officials to investigate electronic payment services and various online platforms when necessary.

“Platforms such as Mercari and BASE are Japanese companies, so they are required to provide data if requested by the tax authorities. The same applies to electronic payment services such as PayPal and Square.

If someone runs a handmade goods side business, even if sales are divided into small amounts across multiple websites, the total amount can be combined and investigated. Even overseas accounts are subject to CRS (Common Reporting Standard), under which account balances and income information are automatically shared with Japanese tax authorities. Also, if compensation is received in the form of points, it is treated as miscellaneous income.”

Just as we use AI to improve our own work efficiency, AI-driven efficiency improvements are also advancing within tax offices. We are entering an era where previously overlooked failures to report income are increasingly likely to become targets for investigation.

The assumptions that “it’s a small amount,” “it’s cash,” or “it’s overseas” are ones that people should reconsider immediately.

Things you can do right now! Essential self-protection measures

So, what self-protection measures can you take from now? Mr. Yamada recommends organizing your accounts and profiles.

“If you keep everything together, there is a possibility that you will be asked, ‘Aren’t all of these just personal expenses?’ So, as a first step, it is a good idea to separate bank accounts and credit cards for business use and personal use. I also recommend separating accounts on e-commerce sites such as Amazon.”

It may feel like extra work, but the difference in whether you can explain things properly when an audit actually takes place is significant.

Next, there are also some tips you should know regarding handling expenses. The “Blue Return Financial Statement” attached to tax returns and the “Statement of Revenues and Expenses (for white tax returns)” include a section called “Special circumstances during the current year,” where you can add explanations about the reasons for expenses and the background of your business. Few people make use of this section, but if you have expenses that might appear questionable, writing down special notes can help prevent unnecessary audits.

“If it is troublesome to write down the reasons for expenses, one method is to simply record them in a voice memo and have AI summarize them later. You can also ask AI questions such as, ‘Will an expense with this reason be accepted?’”

We are now in an era where tax authorities are using AI, so taxpayers should also use AI to prepare themselves. This change in mindset is something worth remembering.

On the other hand, there are things that you absolutely must not do.

“Altering figures on invoices or putting sales revenue into another bank account are forms of falsification. They can become subject to the severe penalty known as an additional heavy tax.”

There have been actual cases where people had part-time income paid into a relative’s bank account in order to avoid losing dependent status, or where they changed the amount on a payment statement using correction tape before filing their tax return. Both cases resulted in the application of the additional heavy tax, and in the part-time worker’s case, the person lost dependent status. The naive belief that they probably won’t find out ended up leading to more serious consequences.

So, what should you do if you receive a tax audit?

“If you are able to handle it yourself, please respond honestly. If you are not confident dealing with it alone, or if you are too busy, I think it is also a good idea to seek help from a tax accountant or accounting firm that specializes in handling tax audits. Compared with handling it by yourself, having a tax accountant involved may result in the additional tax assessment being settled at a more appropriate amount.

Some people become nervous when they hear the words ‘tax audit,’ but if you have been doing things properly, there is no need to be afraid. Just respond calmly and you will be fine.”

With many changes taking place in tax-related matters this year, it is a good time to pause and review the rules.

▼ Shinya Yamada. Certified public accountant and tax accountant. Chairman of Entertainment Culture Tax Accountants Corporation. He leads an accounting firm specializing in the entertainment industry, including celebrities, anime, music, publishing, and YouTubers. His book “Why Doesn’t the Bamboo Pole Shop Go Bankrupt?” has sold more than 1.65 million copies, becoming a bestseller. His YouTube channel “Otaku Accountant ch” has more than 1.17 million subscribers. He is active in a wide range of fields, including television appearances and drama supervision.