EFFECT OF TAX AUDIT AND INVESTIGATION ON REVENUE GENERATION IN NIGERIA
CASE STUDY OF FEDERAL BOARD OF INTERNAL REVENUE SERVICE
(LAGOS IRS ANNEX OFFICE)
1.0. BACKGROUND TO THE STUDY
In recent times, there has been the urge for tax authorities in Nigeria to carry out spontaneous and sporadic tax audits and investigations on taxpayers, especially corporate bodies, suspected of tax evasion or tax delinquency. In doing so, the tax authorities, in discharge of their duties as contained in the enabling tax laws, adopt various methods in tackling taxpayers. The taxpayers, on the other hand, are quick to resist any additional tax burden that might drain their pockets.
While tax authorities do have statutory powers to conduct tax audits and investigations on taxpayers to ensure that the revenues due to government are not lost by way of false returns, these powers are, however, not without legal limits. Tax audits and investigations are very complex and tasking processes and as such, tax managers and their consultants must understand the rules of the game.
A tax audit is an examination of whether a taxpayer has correctly assessed and reported their tax liability and fulfilled other obligations. Tax audits are often more detailed and extensive than other types of examination, such as general desk checks, compliance visits/ reviews or document matching programmes.
Tax Audit and Investigation has been known since the biblical era. Yet, many are never comfortable discussing taxation, worse still Tax Audit and Investigation. To deter evasion and maximize compliance with tax laws is key in government’s Revenue Policy. One of the aims of Tax Audit and investigation is to drive the taxpayer to comply with the outcome of tax audit investigation and also to make him become compliant with the provisions of tax laws in future. That is why the terms have become synonymous with the efforts of government to generate Revenue.
Taxation has evolved through many stages over the years, and has assumed many different forms. In ancient Egypt, scribes collected taxes. During one period the scribes imposed a tax on cooking oil. To ensure that citizens were not avoiding the cooking oil tax, the scribes would audit households to ensure that appropriate amounts of cooking oil were consumed and that citizens were not using leavings generated by other cooking processes as a substitute for the taxed oil.
The taxpayer is a dodger when it comes to the issues of tax payment. He therefore needs to be motivated seductively or by force into paying what is expected from him. The taxpayer is always unwilling to pay his tax liability. The use of tax audit has however helped in the generation of revenue to the government. Adediran, Alade & Oshode (2013), opined that, tax audit just like financial audit involves the gathering of information and processing it for determining the level of compliance of an organization with tax laws of the territory. For a successful audit, it is necessary that the auditor organizes his work in such a way that the assignment is accomplished completely and efficiently.
Moreover, the primary goal of a revenue body’s compliance activity is to improve overall compliance with their tax laws, and in the process instill confidence in the community that the tax system or policy and its administration are fair. Instances of failure to comply with the relevant tax laws are inevitable whether due to taxpayers’ ignorance, carelessness, recklessness and deliberate evasion, or weaknesses in administration. To the extent that such failures occur, governments, and in turn the communities they represent, are denied the tax revenues they need to provide services to citizens.
According to OECD (2006), a tax audit is an examination of whether a taxpayer has correctly assessed and reported their tax liability and fulfilled other obligations. Prior to 1998, tax payers in Nigeria (persons and corporations) were assessed to tax by the relevant tax authorities; a system otherwise known as government assessment. With the introduction of self-assessment scheme into the Nigerian tax system in 1998, tax payers are now required to file in their tax returns independently. This practice informed the need for tax audit, to ensure tax payers file in accurate information regarding their income and expenses. Tax payers are inherently disposed to reducing their tax liability either through tax evasion or tax avoidance.
The Audit unit of the Federal Inland revenue Service (FIRS) employed audit tools to identify tax evaders and to officially carry-out enforcement on any company. One of such audit tools is the risk engine tool for identification of tax evaders or non-compliant taxpayers. Companies flagged by such tools are either subject to tax audit or tax investigation. In line with its statutory mandate and the provisions of Sections 58 and 60 of the Companies’ Income Tax Act (Cap. 21 LFN 2004) and Sections 26 and 27 of the Federal Inland Revenue Service (Establishment) Act 2007 (Iheanyi, 2014).
1.2. STATEMENT OF PROBLEMS
Historically, most taxpayer-driven failures or compliance risks have been addressed nearly exclusively in terms of regulatory enforcement through an audit-based approach. In more recent times, tax revenue administrators have come to realize that the factors underlying taxpayers’ compliance behaviour in any specific risk area are varied and often complex, and are unlikely to be treated successfully with a ‘single action’ strategy, particularly one based exclusively on regulatory enforcement action such as audits and investigations.
Though, the principal source of a government’s revenue should be taxation. This is not the case in Nigeria. The country relies heavily on crude oil revenue and foreign loans and aid for a significant fraction of revenue for governance. This is largely due to poor tax administration capacity and collection ability in the country. In the first place, while tax policy and tax laws create the potential for raising tax revenues, the actual amount of taxes flowing into the government coffers, to a large extent, depends on the efficiency and effectiveness of the revenue administration. Weaknesses in revenue administration lead to inadequate tax collections. Borrowing to finance the resulting budget deficit could cause an unsustainable increase in public debt and inflation.
Furthermore, there is a high incidence of corruption within the taxes and customs administrations. The government suffers major revenue leakages as dishonest revenue officials allow unjustified tax breaks to willing tax evaders. Also, honest taxpayers suffer as corruption in revenue administration leads to harassment, inflated assessment, high litigation cost and leniency towards non-compliant competitors. This high cost of corruption to the government and private sector respectively, is a major setback for the process of tax administration in a country. Any serious effort to reduce corruption in a country and improve governance, in all likelihood, has to involve reform of the revenue administration.
Finally, with globalization, goods and services are produced by taxable entities in multiple countries. This presents vast opportunities for manipulating transactions to reduce the tax burden. Without a matching increase in the professional and technological capacity of the revenue administration, the existence of corruption, tax havens and increasing use electronic financial transactions will continue to pose major challenges in enforcing the tax laws. This will further reduce the chances of monitoring taxable activity and countering tax evasion. For this reason tax audit plays an important role to increase the capacity of revenue administration.
In the last couple of years tax audit and investigation has been a critical issue often discussed in Nigeria. The tax authority has had lots of sleepless nights, trying to review the books of the tax payers with the sole aim of increasing the revenue of the government. The question is to what extent has tax investigation and audit contribute to the revenue generation in Nigeria?
It is against this backdrop that we define tax audit as a process in which the tax authority examines certain issues relating to the profits of a company and its other related returns, as it may deem necessary and expedient in accordance with the relevant provisions of the Act. It is usually a routine exercise, although its outcome could lead to a re-assessment or referral for special investigation, especially if tax evasion is suspected.