TAX AUDIT AND INVESTIGATION IN NIGERIA: A GENERAL OVERVIEW OF THE TAX AUDIT AND INVESTIGATION PROCESS
Tax audit is a process whereby tax returns filed by taxpayers are assessed in accordance with the provisions of the law. A tax audit involves an examination of a taxpayer’s (an organization or individual) tax returns to establish that the financial information at the base of the tax returns is reported correctly and completely. Under the self-assessment regime, taxpayers are expected to file returns monthly, quarterly and yearly depending on the nature of taxes being filed. The taxpayers must willfully declare taxes and file returns with the Relevant Tax Authorities (RTA) in Nigeria (Federal Inland Revenue Service and State Internal Revenue Services).
Tax Audit in a global context may be executed through the following:
- Mail Audit: This is the type of tax audit process whereby Relevant Tax Authorities (RTA) notify and request the taxpayer to provide additional documents or clarification on certain tax returns declarations and deductions.
- Office Audit: This is an additional audit process to the mail audit whereby taxpayers need to visit the tax office to provide additional information as requested by the RTA.
- Field Audit: This is an audit process whereby tax officers directly examine the documents submitted and question the taxpayer onsite.
- Desk Audit: This is the type of audit process whereby the tax officer reviews the documents submitted to the tax authority monthly or annually in line with the provisions of the tax law.
STAGES OF TAX AUDIT PROCESS
A typical RTA tax audit process is the pre-audit stage, field audit stage and post-audit stage:
- Pre-Audit Stage:This involves the tax audit planning stage and consists amongst others of the following activities: selecting taxpayers; notifying taxpayers of tax audit exercise and selecting tax audit teams. These are all done within the RTA’s premises.
- Field Audit stage:This commences on the agreed date in the Taxpayers premises and signifies the beginning of the tax audit cycle. The activities at this stage are carried out at the premises of the taxpayer. The service of the Assessments and Demand Notices on the Taxpayer signifies the end of the audit cycle.
- Post Audit Stage:This consists of activities relating to the collection and appeal procedure and covers amongst others: payments, objections and appeals by taxpayers based on the provisions of tax laws.
Tax investigation is an advance procedure and inquiry into the tax audit of a taxpayer by the RTA to recover undercharged taxes from previous years triggered on the suspicion of fraud, evasion or wilful default of the taxpayer with regards to non-compliance with tax obligations.
Tax investigation aims to gather sufficient evidence after a tax audit must have been carried out and there is evidence to suspect tax evasion, fraud or incorrect tax deposited by the taxpayer. The RTA notifies the taxpayer of its intention to conduct a tax audit exercise at least 2 weeks before the beginning of the audit exercise by sending an official memo specifying the period being audited, audit commencement date, and the audit checklist. Audit timelines may be extended at the request of the taxpayer, and in such case, another official memo may be sent to the taxpayer by the RTA communicating acceptance of the new proposed timeline.
EXPECTED AUDIT SELECTION CRITERIA
The audit selection criteria for a tax audit or investigation are usually at the discretion of the RTA. The selection criteria employed by the tax authorities to determine the taxpayer’s records to be reviewed are as follows:
- Standard Approach: This approach most often begins as a desk audit and may lead to a field audit if the RTA is not satisfied with the initial supporting documents provided by the taxpayer.
- Target/Industry Approach: This approach involves a review of taxpayer’s records based on intelligence gathered internally or from external sources or based on peculiarities of the industry where the taxpayer operates. This approach focuses on specific issues which are of interest to the RTA.
- Risk-Based Approach: Under this approach, the RTA assesses the taxpayer’s records, industry and, operational peculiarities based on predetermined parameters. Thereafter, only selected records falling within the predetermined parameters are selected for review.
- Holistic Approach: Under this approach, the taxpayers are selected for a periodic review. This review enables the RTA confirm the appropriateness of self-assessment returns.
FINANCIAL REPORTING IN NIGERIA ON AUDIT TRIGGERS AND EXPOSURES
The current financial reporting in Nigeria is meant to comply with standards issued from time to time. It is in the taxpayers’ interest to review their transactions to comply with the reporting framework and to understand the tax implication of such frameworks under the relevant tax laws in order to determine the tax deductibility or otherwise of such reporting classification which affects the income or profits declared.
The following represents primary audit and investigation triggers and risk exposures to taxpayers:
- Significant fluctuations in assessable profits
- Huge and consistent loss situations;
- Significant capital allowance and unutilized capital allowance claim;
- High Value Added Tax (VAT) and Withholding Tax (WHT) refund claim situation;
- Huge cost deductibility claim — for instance huge bad debts provision or written off situation,
- High expenses to revenue ratio;
- Related party transactions;
- Business restructuring, mergers, and acquisition situation;
- Double taxation agreement claims etc.
Tax audit and investigation is of paramount importance to taxpayers and if not properly managed, the outcome of the exercise could harm the reputation, operations and business of the taxpayer in terms of penalties and interest that the RTA may impose as additional tax liabilities (except companies income tax and education tax).
Before the introduction of the self-assessment scheme, there was no specific provision in the Companies Income Tax (CIT) Act for tax audit and tax investigation. However, the CITA, based on subsequent amendments, empowers the FIRS to carry out tax audit or investigation of taxpayers’ books of accounts and records. Thus, under the self-assessment tax filing regime, the RTA would need to periodically review and verify the tax returns submitted by taxpayers by way of an audit and/or investigation.
The tax audit and investigation exercise essentially is meant to enable the RTA to satisfy itself that the relevant returns submitted by the taxpayers agree with the underlying records and are sufficient for determining the taxable profits of the taxpayer and, consequently, the tax payable.