The recent revenue drive arising from fall in oil prices and the need to diversify Nigeria's revenue away from oil to non-oil sources, such as taxation, has led to increase in the frequency of tax audits and investigations conducted by both the Federal Inland Revenue Service (FIRS) and the State(s) Boards of Internal Revenue (SBIR).
The Federal Inland Revenue Service (FIRS) in 2018 recorded a total tax collection of N5.320triIIion with N2.852triIIion from non-oil revenue and N212.792biIIion from 2278 audit cases. It also claims a huge reduction in audit cycle and has hinted of its intention to surpass the collection figure in 2019. The ambitious collection targets coupled with the claimed data on registered and unregistered companies not contributing to the Country's tax collection, signals an intending intensified effort directed at achieving the set targets. No doubt, achieving the set targets would require broadening the scope of tax coverage, continued compliance drive by taxpayers, more aggressive and timely tax audits and investigations, and lots of emphasis on entities not currently contributing to the Country's tax collection.
This briefing note aims to broaden taxpayers' understanding of tax audit and investigation processes, while also providing useful insights towards efficient audit and investigation management process that provides the best possible outcome.
Tax Audit & Investigation
A typical tax audit process entails review of taxpayer's records to ascertain compliance with relevant tax laws. It is usually for not more than 6 years from the date of submission of the relevant returns or receipt of the audit notice. While a tax investigation is an inquiry into the tax activities of a taxpayer by the tax authority to recover undercharged taxes from previous years, triggered on the suspicion of fraud or wilful default of the taxpayer with regards to non-compliance with tax obligations. There is no time bar for investigations as such investigations can go as far back as the date of incorporation of a company.
Apart from the routine compliance review conducted by tax authorities, typical tax audits in Nigeria are of two forms—desk audit & field audit. A desk audit usually involves the tax authority conducting a review of the self-assessment returns filed by a taxpayer to ascertain its completeness and correctness without being physically present at the taxpayer's business premises. Under desk audits, the tax authorities typically request for clarifications and documents from the taxpayers with regards to information contained in the taxpayer's self-assessment returns.
On the other a field audit is a much more elaborate process which involves a physical visit to the taxpayer's premises.
Please note that the revenue authorities such as FIRS and LIRS make use of consultants called the Tax Audit Monitoring Agents to assist with the Tax Audit Process.
Only the last 6 calendar/financial years preceding an audit request may be checked during a field audit, if those years have not been previously audited. In the event audit has been conducted for previous years, the audit shall be limited to previous financial years. For instance, an audit request in 2017, may only be for 2016 or for 2010 to 2016.
A Relevant Tax Authority (RTA) typically does not conduct field audits of the same period twice, however, there are isolated instances where this has happened, usually owing to administrative directives by the RTA. Also, where a fraud is suspected, an investigation may be conducted notwithstanding the fact that an audit has been conducted on a previous year.
The RTA typically notifies taxpayers of its intention to conduct a field 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 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.
RTA's Audit Selection Criteria
The selection criteria for a tax audit or investigation are usually at the discretion of the tax authority. Outlined below are selection criteria employed by the tax authority in the past to determine the taxpayer's records to be reviewed:
- Standard Approach: This approach most often begins as 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/lndustry 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 relevant taxpayer operates. This approach focuses on specific issues which are of interest for 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.
Audit Triggers and Exposures
Current financial reporting in Nigeria is meant to comply with standards issued from time to time by the International Accounting Standard Board (IASB). Taxpayers are advised to review their transactions to comply with the reporting framework and to understand the tax implication of such frameworks under the tax laws so as to determine the tax deductibility or otherwise of such reporting classification which affects the income or profits declared.
The following represent primary audit or 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.
Taxpayers are advised to not only maintain proper and adequate records but to also ensure sufficient third-party supporting documents are available as these are vital to addressing any issue raised by the tax authority either during desk audits, field audits, and also the audit reconciliation stage as it helps ensure timely closure of tax audits and investigations.
The appointment of a tax managers to provide professional support and representation also helps ensure an easier audit process.
Thoughts & Take-away:
Tax audit or investigation is one that requires adequate planning and preparation. The best approach would be for taxpayers to understand the tax implication of transactions at the point of undertaking them while ensuring adequate compliance arising from such transactions.
Tax audit in Nigeria sometimes last more than a year, mostly resulting from the arbitrary approach employed by persons employed by Tax Audit Monitoring Agents employed by tax authorities to conduct the audit process and this consequently results in time wastage and additional cost to taxpayers.
A key point to note in an audit process is the fact that documentation is key! Taxpayers are advised to ensure documents are available to support transactions with regards to the audit triggers mentioned above and more. The role of a tax manager as a support to taxpayer in an audit or investigation process cannot be over-emphasized.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.