TAX AUDIT AND INVESTIGATION
TAX AUDIT: A tax audit entails reviewing taxpayers’ records to ascertain compliance with relevant tax laws, meaning paying taxes correctly and when due in line with the provisions of the applicable tax laws. It is usually for not more than six (6) years from the date of submission of the relevant returns or receipt of the audit notice.
In other words, it is an inspection of a taxpayer’s business records and financial affairs to ensure that the amount of tax reported and paid is as per tax laws and regulations. There is an additional audit to the statutory audit, and tax officials from the relevant tax carry it out
Authorities. This is not the same as the statutory audit concerning the requirement of the Company and Allied Matter Act (CAMA) 1990 (as amended). It should also be noted that cases that may trigger the selection of taxpayers (individuals, companies and agencies) for tax audit include:
i. Persistent loses;
ii. Nil tax returns,
iii. Unnecessary claims for tax refunds;
iv. Non-submission of returns;
v. Low tax yield;
vi. Suspicion of tax avoidance;
vii. Fraud or evasion,
viii. Transfer pricing manipulation (trade between related parties at prices meant to manipulate markets or to deceive tax authorities);
ix. Thin capitalization (high level of debt compared to equity);
x. When taxpayers request a tax clearance
Certificate (TCC) and other factors that may necessitate tax audits.
TAX INVESTIGATION: A tax investigation is an inquiry into the tax activities of a taxpayer by the tax authorities to recover undercharged taxes from previous years, triggered on suspicion of fraud or willful default of the taxpayer with regard to non-compliance with tax obligations. It can be described as an advancement from a tax audit. It entails more detailed examinations by relevant tax authorities to recover Undercharged taxes in previous years due to information/suspicion that the taxpayer might have evaded tax. There is no time limit or time bar to tax investigation as it can go as far as the date the business started.
THE LEGAL BASES OF TAX AUDIT AND INVESTIGATION: No activities can occur in the relevant tax authorities without a legal backup. The provisions of Sections 47(4) and 48(4), 55, 73 & 81(2 & 3) of the Personal Income Tax Act Cap P8, LFN 2011 as amended therefore empowered the RTAs to carry out tax audit/investigation from time to time when the needs arise.
Objectives Of Tax Audit And Investigation: Tax Audit and Investigation aims include the following.
a. Adequate accounting books and records exist to determine the taxable profits or loss of the taxpayer and, consequently, the tax payable;
b. The tax computations submitted to the authority by the taxpayer agree with the
underlying records;
c. All applicable tax legislation has been complied with;
d. Provision of an avenue to educate taxpayers on various requirements of the tax laws;
e. Discourage tax evasion;
f. Detect and correct accounting and/or arithmetic errors in tax returns;
g. Provide feedback to the (tax administrators) on various provisions of the law and recommend possible changes;
h. Identify cases involving tax fraud and recommend them for investigation;
i. Forestall a taxable person’s failure to render tax returns;
j. Forestall a taxable person generating incomplete or inaccurate returns in support of the self-assessment.
TAX AUDIT PROCESSES & PROCEDURES
A. Pre-Audit Procedures
Letter of notifications to carry out audit/investigation is sent to the selected or identified taxpayers for audit/investigation. The letters contain checklists of documents required to be made available by the taxpayers for the inspection of the Audit Team. Specimen of the Checklist, subject to modification to suit the required information from particular taxpayers, is shown below.
Checklist of Documents Required From The Company
1. Nominal Staff List from Human Resources
2. Company’s Audited Accounts for the preceding year
3. Record of sublet contracts
4. List of all expatriates working on the projects in Niger Stat
5. Expatriates Quota for the preceding year
6. Expatriates Immigration Returns January-December of the previous year
7. Expatriates Appointment letters
8. List of Premises in Niger State
9. Bills of granites and laterites excavated on the land of Niger State.
10. Payrolls and Salaries Bank Statements for the previous year
11. Where there are claims of employees to have worked with the company for less than 12 months, evidence like appointment letters/disengagement letters/transfer letters must be provided.
12. General Ledgers (Payment Vouchers) for the previous year
13. Payment Receipt(s) for monthly PAYE Remittances
14. Payment Receipt(s) for Development Levy
15. Payment receipts for Withholding tax
16. Payment Receipt(s) for Business Premises Registration/Renewal Fee
17. Payment Receipt(s) for haulage fee Payment Receipt(s) for haulage fee
18. Payment Receipt(s) for Registration/Renewal Fees for Private Educational Institutions
19. Payment Receipt(s) for Registration/Renewal Fees for Private Hospitals/Clinics &Pharmacies
20. Payment Receipt(s) for haulage fee
21. Payment Receipt(s) for Environmental Waste Fee
22. Approved Certificates of Pension/NHF/NHIS plans (where applicable)
23. Schedules of deductions/Remittances of Pension/NHF/NHIS (where applicable).
24. Where there is a claim of voluntary pension contribution above statutory contribution, evidence of employees’ pension statements must be provided
25. Evidence of payment of previous tax audit Liabilities.
26. All payment receipts, documents & information deemed relevant but not mentioned here.
B. Pre-audit meeting: To be held between the Audit team and the Management of the establishment before the commencement of the exercise. The meeting is meant to familiarize the audit team with the operations, organizational structure and related background information of the establishment. To be held preferably on the organization’s premises.
C. Preliminary Action
1 Confirm the availability of all documents required to be presented by the organization for the exercise. Note un-submitted documents for further enquiry
2 Review prior audit reports (if any), previous tax liabilities yet to be settled (if any) and related audit working papers.
3 Inspect copies of the Tax Audit Clearance Certificate(s) issued to the taxpayers in respect of audit exercises executed for previous years
4 Review copies of all the remittances made during the period under review
5 Review statutory registration documents such as Certificate of Incorporation, Business registration certificate with State Government and other regulatory agencies, Form Co7, Evidence of the business commencement date, and returns filed with SIRS.
6 Obtain and review copies of the tax clearance certificate TCC of the directors of the organization
7 Review organizational structure and list of staff in each department/unit as well as payroll information from relevant department/unit
8 Review the list and details of banks maintained by the taxpayers, list of vendors or suppliers, creditors and other major stakeholders.
AUDIT AND COMPLIANCE TEST PROCEDURES
I. Determination of PAYE Liability:
1. Compare staff nominal roll from Human resources with payroll from Finance to ensure accuracy and completeness. Compare staff designations against the confirmed Salary Scale of the establishment.
2. Determine the comprehensive nature of the nominal roll information. Should contain names, designations, date of employment and last promotion, salary grade level etc.
3. Determine the comprehensive nature of payroll information. It should contain staff designation, salary grade level, basic salary, all allowances, deductions made during the period etc.
4. Determine that accurate computation are made for deductions from salaries, i.e. contributions to NHF, Pension, NHIS, and that they are remitted to the appropriate organization. Obtain evidence of remittance as a criterion for granting reliefs.
5. Review copies of pay slips of selected staff and compare them with the figures in the payroll to ensure staff income is fully declared in the payroll.
6. Review appointment letters and the last letter of promotion of selected staff obtained from the Human resources unit to test the integrity of staff designations. Document all test results.
7. Review the Human Resources policy document in respect of employment policies to provide ample information on promotion and general conditions of employment.
8. Review the audited financial statement for the period under review and compare the staff cost in the statement with the payroll presented. Note all exceptions and ensure clarifications are provided where required
9. Review the payroll meticulously to establish that salary is comparable to industry standard. Establish the absence of under-declaration of income. When sufficient grounds give room to doubt the integrity of income declared as a result of integrity tests, salary can be estimated and inserted in the payroll to provide an expected income that ought to have been collected by the staff
10. From established staff income status, compute PAYE liability
11. Ensure the accuracy of computation by subjecting it to a further test.
12. Summarize PAYE computation and determine outstanding tax liabilities (if any) by deducting the tax paid during the period under review.
13. Determine the necessary penalties on the outstanding liability following the provisions of PITA to determine the total PAYE liability due.
II. Determination of Withholding Taxes
1. Review all payment vouchers or cash books to extract details of payments made to vendors/suppliers, as well as information about the name of the vendor, address, services rendered, or supplies made, and the amount paid.
2. Ensure the vendors are individuals or business names only whose WHT is payable to the state government in line with relevant tax laws
3. Review rent paid by the taxpayers and extract details of the payment to obtain the names of beneficiaries
4. Compute WHT on supplies or services rendered by the vendors, individuals/company names, as well as rent paid accordingly
5. Summarize computations for the period under review and apply penalties (if applicable) on the outstanding as required by the relevant tax laws
III. Determination of Directors’ Fees
1. Review audited financial statements for the period under review and determined what was paid to the director as fees.
2. Review audited financial statements on the director’s (current) account, accumulated fund or any other account classification to establish a full explanation of the beneficiaries of the fund. Determine if such a fund is a director’s fee or not. All test results should be documented.
3. Compute directors’ fees by charging 10% as relevant tax laws require.
4. Compute penalties as laws require on the outstanding payment for the period under review (where applicable).
5. Summarize the computation of directors’ fees for the period under review.
IV. Examination of bank and financial statements
1. Review bank statements of all the bank transactions and conduct an extensive assessment on the movement of funds to establish the accuracy and integrity of salaries, payment(s) to vendors, and other payments. This includes bank(s) the directors maintain for their personal transactions (where necessary). Un-cleared transfer(s) and payment(s) should be interrogated to ensure the absence of possible tax evasion.
2. Funds not supported with full explanation shall be considered as undisclosed income and taxed accordingly.
3. Carry out a periodic review of the financial statement to extract vital information on the financials to establish expenditures made on a line basis, staff cost, operating expenses etc.
V. Post-Audit Processes
1. Collate all information from the audit exercise and compute to establish final cumulated liabilities from all categories.
2. Prepare a preliminary audit report detailing the final audit liability of the establishment for vetting and approval.
3. Serve audit report communicating the audit findings and established audit liability to the establishment.
VI. Reconciliation Processes
1. Convene reconciliation meetings if establishment disputes audit liabilities within the statutory period
2. Execute reconciliation to establish a new position
VII. Post-Reconciliation Processes
1. Issue a report containing amended tax liability/restating audit liability (as the case may be)
2. Issue final liability if not paid within the statutory period
3. Issue reminders to an establishment where liability is not settled after the expiration of the statutory period
4. Recommend establishment for enforcement where liability remains unsettled by the establishment after a reminder issued
Viii. Notice Of Intent To Enforce Recovery
Where taxpayers still dispute tax liability after reconciliation, the tax authorities may reject other letters of objection and issue a notice of intent to enforce recovery.
IX. Enforcement Action To Recover Tax Liability
This is the last option towards tax recovery from audit/investigation. The relevant tax authorities may enforce the recovery of tax liabilities in line with the provisions of the applicable tax laws where taxpayers remain adamant about the Notice of Intent to Enforce Recovery.