Even “Tens of Thousands of Yen on Mercari” Are Targets! People at Risk of Being Targeted by the National Tax Agency’s “KSK2” AI, Set to Go Live in September

According to income tax audit results released by the National Tax Agency at the end of last year, the amount of back taxes collected reached a record high of 143.1 billion yen. This is said to be the result of more efficient audits enabled by AI.

In addition to AI, the National Tax Agency’s core system, “KSK2,” will go live in full on September 24 of this year. It’s not just unscrupulous businesses plotting tax evasion that are being targeted. Income such as tens of thousands of yen earned on Mercari, YouTube ad revenue, and even small part-time jobs at night are also in the crosshairs. People who let their guard down, thinking, “It’s a small amount, so it’s fine,” or “I’m handling it directly in cash, so they won’t find out,” may be in danger.  

We spoke with Shinya Yamada, an “otaku accountant” with approximately 1.17 million YouTube subscribers.

The “Three Types” Targeted by AI Investigations

KSK2 is the National Tax Integrated Management System, a massive database operated by the tax office. The old system, which had been in operation since 2002, has been overhauled, and information on income tax, corporate tax, consumption tax, and other taxes will now be centrally managed. By combining KSK2 with AI, the accuracy of tax audits is expected to increase significantly, and it is said that inquiries and audits from the tax office may become more frequent.

Mr. Yamada points out that there are “three types” of professions that are particularly likely to be targeted.

“People whose business activities are easily visible on social media, those earning income through overseas platforms, and those with a high volume of cash income need to be especially cautious.”

“People whose actual activities are easily visible on social media” refers to those who publicly share their business activities or personal lives on social media. This includes influencers, owners of independent salons such as hairstylists and manicurists, and independent consultants.

“If you frequently post on social media about dining at high-end restaurants or traveling abroad, yet your declared income is only 1 million yen… well, obviously, that’s going to trigger an AI flag, right?　 “A while back, there were rumors that appearing on an in-depth documentary program would trigger a tax audit. The idea was that if footage showed luxurious furniture and expensive furnishings, but the tax return reported an amount that didn’t match that lifestyle, an audit would follow. Now, that role has been taken over by social media posts.”

So, who exactly are these “people earning income from overseas platforms”?

“It refers to revenue from platforms like YouTube, TikTok, and X. Since these payments come from overseas corporations, there’s no system in place to automatically submit a ‘payment statement’ (a document that notifies the National Tax Agency of who was paid and how much) like there is for domestic companies. As a result, people tend to forget to report this income, assuming, ‘The tax office probably doesn’t know about it,’ but that’s a major misconception.”  

Income from overseas is ultimately transferred to a domestic bank account. KSK2 can cross-reference data on overseas transfers to bank accounts with the figures in your tax return. The era of thinking, ‘It’s an overseas transaction, so they won’t find out,’ is over. Rather, you should recognize that ‘precisely because it’s an overseas transaction, AI-driven monitoring is becoming even stricter.’”

The third category involves occupations with high cash income. This may include hostess club owners, hostesses and hosts, breeders, and those earning income through “sugar daddy” arrangements.In fact, according to the latest survey results released by the National Tax Agency (“Status of Income Tax Audits”), hostess clubs (club owners) ranked first among industries with the highest amounts of unreported income, with the “average amount of unreported income per case” during tax audits reaching 41.64 million yen(Incidentally, “hostesses and hosts”—such as cabaret club hostesses—also ranked third, with an average of 29.68 million yen).

“It’s common knowledge that you’re required to file a tax return if your annual income exceeds 200,000 yen. In fact, income from sugar dating also qualifies as miscellaneous income. People often assume no one will find out, but there are cases where it comes to light due to information provided by friends or the sugar daddy when some kind of trouble arises.”

While the ways in which this is discovered vary, in any case, it is said that unreported income that had previously gone unnoticed is now more likely to come to light.

“In the past, tax officials selected investigation targets based on their experience and intuition, so quite a few people slipped through the cracks. Now, AI has taken on that role. The likelihood that people who were previously overlooked will become targets of investigation has increased dramatically.”

Why Did It Get Found Out? The True Identity of KSK2

What does it mean that AI accuracy improves with the launch of KSK2?

“It appears that KSK2 uses AI to select targets for investigation. The KSK database—the predecessor to KSK2—was accessed by humans who conducted investigations manually, but AI was introduced around Reiwa 4, and it’s said to have made the work significantly easier. This means that while tax officials previously relied on experience and intuition to spot discrepancies in tax returns, AI now analyzes vast amounts of data to accurately identify them.”

Another major change is the “elimination of silos.”

“Until now, income tax, corporate tax, and consumption tax were managed by separate systems, so we had to retrieve and verify data from each one as needed. Going forward, however, we’ll be able to view all of this on a single screen. It may seem like a minor detail, but eliminating these silos will make our work significantly easier.”

This change could also benefit taxpayers.

For example, if a taxpayer receives compensation from an overseas client, those overseas transactions are exempt from consumption tax and are therefore not counted as revenue on the consumption tax return. As a result, looking solely at the consumption tax return might make it appear that revenue is low, but when viewed in conjunction with the income tax return, it becomes clear that this discrepancy is due to the overseas transactions.

With the previously siloed system, this connection was often overlooked, leading to frequent instances of unnecessary audits.

“If you file your tax returns properly, unnecessary audits will disappear. For those who are diligent, the introduction of KSK2 is a definite benefit.”

“Thinking ‘It’s under 200,000 yen, so I’m safe’ is the most dangerous mindset”

There’s nothing to fear if you file your tax return properly. However, there’s a pitfall in the mindset among salaried employees who think, “Since my side job income is under 200,000 yen, I don’t need to file a return.”

“There is a rule that if your side job income is 200,000 yen or less, you are not required to file an income tax return. To begin with, this rule was established because the tax office was understaffed and couldn’t handle the workload. Now that AI adoption is advancing, it wouldn’t be surprising to see discussions about whether this exemption rule itself is no longer necessary.”  

Furthermore, while it has traditionally been said that ‘white-form filers are less likely to be audited,’ now that AI is selecting audit targets, it’s reasonable to predict that any discrepancies—regardless of whether you file a white-form or blue-form return—will result in an audit. Although there have been no official announcements regarding this at present, it’s entirely possible that such changes will be introduced in the future.”

So, how exactly will you be contacted by the tax office?

“For discrepancies in the range of several hundred thousand yen, you’ll receive a simple notice—an ‘inquiry’—in an envelope. If you ignore it, it will escalate into a full-scale tax audit. If you file an amended return immediately upon receiving the inquiry, there won’t be any particular issues.”

An “inquiry” is a light verification; if there were a serious issue, a full-scale tax audit would be launched from the start. Even if you receive an inquiry, there’s no need to panic, but you absolutely must not ignore it.

Furthermore, the scope of data accessible to the tax office is much broader than you might think. In addition to bank accounts, the infrastructure is being put in place to investigate electronic payment systems and various platforms if necessary.

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

  If you run a side business selling handmade goods, even if your sales are spread across multiple sites in small amounts, they will be aggregated and investigated. Even for overseas accounts, under the CRS (Common Reporting Standard), account balances and income information are automatically shared with the Japanese tax office. Furthermore, if you receive compensation in the form of points, it is classified as miscellaneous income.”

Just as we are using AI to improve work efficiency, the tax authorities are also advancing efficiency through AI, and we have entered an era where previously overlooked omissions in tax returns are now being investigated. It would be wise to immediately reconsider the mindset that “it’s a small amount,” “it’s cash,” or “it’s overseas.”

Do It Now! Essential “Self-Protection Measures”

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

“If you keep them all together, you might be asked, ‘Aren’t all these personal expenses?’ So, first, it’s a good idea to separate your bank accounts and credit cards into business and personal categories. I also recommend separating your accounts on e-commerce sites like Amazon.”

It might seem like a hassle, but it makes a huge difference in whether you can explain yourself if an audit comes along.

Next, there are some tips you should know regarding the handling of business expenses.The “Blue Return Financial Statements” or “Income and Expense Statement (White Return)” attached to your tax return have a section titled “Special Circumstances During the Current Year,” where you can explain the reason for an expense or the background of your business. Few people take advantage of this, but if you have an expense that might raise suspicion, noting the details in this section can help prevent an unnecessary audit.

“If jotting down the reasons for your expenses is a hassle, you can record them on a voice memo app for now and have AI summarize them later. It’s also a good idea to ask the AI, ‘Will this expense be accepted?’”

Since even the tax office is using AI these days, taxpayers should also prepare by utilizing AI. It’s important to keep this shift in thinking in mind.

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

“That would be ‘falsification’—such as altering the figures on an invoice or depositing sales into a different account. This makes you subject to a heavy penalty known as a ‘heavy surcharge.’”

There have been actual cases uncovered where part-time income was deposited into a relative’s account to avoid losing dependent status, or where amounts on payment statements were altered with correction tape before filing. Both cases resulted in the imposition of a heavy surcharge, and in the part-time income case, the individual lost their dependent status. The naive assumption that “they won’t find out” led to even more serious consequences.

So, what should you do if you’re audited?

“If you can handle it yourself, please respond honestly. If you don’t feel confident handling it alone or are too busy, I recommend consulting a tax accountant or accounting firm that specializes in tax audits. Having a tax accountant involved is more likely to result in a more reasonable amount of back taxes than if you handle it on your own.”  

Some people get nervous at the mere mention of a tax audit, but if you’ve kept your affairs in order, there’s no need to be afraid. As long as you respond calmly, you’ll be fine.”

With so many tax-related changes happening this year, it’s a good idea to take a moment to review the rules.

▼ Shinya Yamada: Certified Public Accountant and Tax Accountant. Chairman of the Entertainment and Culture Tax Accountants Corporation. He leads an accounting firm specializing in the entertainment industry, including entertainment, anime, music, publishing, and YouTubers.His book, *Why Doesn’t the Bamboo Pole Shop Go Out of Business?*, is a bestseller with over 1.65 million copies sold. His YouTube channel, “Otaku Accountant ch,” has over 1.17 million subscribers. He is active in a wide range of fields, including television appearances and serving as a consultant for TV dramas.