Taxation, worldwide, constitutes a major source of revenue to governments for funding their capital and recurrent expenditures. 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’. On the other hand, according to the Federal Inland Revenue Service (FIRS), minimum tax is justifiable on the premise that every asset generates income. The minimum tax regulations are therefore anti-tax avoidance measures whether or not the affected company declares a profit, or the company was dormant during the relevant year of tax assessment.
Where a company is dormant, minimum tax is usually charged on the company’s net assets or on its share capital, whichever is the higher of the two.
Meaning of Audit
An audit is an examination usually by an independent person, on a set of the accounting books, records, documents, etc, from which a financial statement has been prepared and/or an examination and verification of a company’s financial and accounting records and supporting documents by an independent party after which an opinion is given on the state of affairs of such books and records.
Objectives of Statutory Audit
The primary objective of audit is to express an opinion on the financial statements of an enterprise as to whether:
i. Proper books have been kept,
ii. The financial statements are in agreement with the books,
iii. The requirements of the applicable legislations, for example, the Companies and Allied Matters Act (CAMA) 1990 (as amended) have been complied with,
iv. Applicable accounting standards (both local and international) have been complied with,
v. The financial statements give a true and fair view of the state of the financial affairs of the enterprise as at its balance sheet date,
vi. The financial statements give a true and fair view of the result of the operations of the enterprise for the period under consideration.
This is an additional audit to the statutory audit and is carried out by tax officials from relevant authority. The approach and scope of work would be slightly different from that to be carried out for an audit under CAMA, 1990.
Objectives of Tax Audit
The objectives of tax audit are to enable the tax auditors determine whether or not:
i. Adequate accounting books and records exist for the purpose of determining the taxable profits or loss of the taxpayer and consequently the tax payable,
ii. The tax computations submitted to the authority by the taxpayer agree with the underlying records,
iii. All applicable tax legislation have been complied with,
iv. Provision of an avenue to educate taxpayers on various provisions of the tax laws,
v. Discourage tax evasion,
vi. Detect and correct accounting and/or arithmetic errors in tax returns,
vii. Provide feedback to the management on various provisions of the law and recommend possible changes,
viii. Identify cases involving tax fraud and recommend them for investigation,
ix. Forestall a taxable person’s failure to render tax returns,
x. Forestall a taxable person rendering incomplete or inaccurate returns in support of the self-assessment scheme.
Powers of FIRS to Audit
Prior to the introduction of the self-assessment scheme, there was no specific provision in Companies Income Tax Act (CITA) for tax audit. Subsection 4 of Section 43 was introduced to empower FIRS to carry out tax audit. The sub-section states: “Nothing in the foregoing provisions of this Section or in any other provisions of the Act shall be construed as precluding the Revenue Service from verifying by tax audit any matter relating to entries in any books, documents, accounts or returns as the Service may from time to time specify in any guideline.”
An integral part of the self-assessment scheme is the need to periodically verify the tax returns filed by taxpayers through tax audit procedures. The tax audit exercise essentially is meant to enable the revenue authority to further satisfy itself that audited financial statements and the related tax computations submitted by the taxpayer agree with the underlying records.
Types of Tax Audit
The scope and type of audit steps to be executed would depend on the type of audit to be performed, the underlying trigger and the objectives to be achieved. At present, FIRS is involved in the following types of audit:
1. Registration Audit – The purpose of this audit is to bring all relevant companies and individuals into the tax net. The audit involves obtaining information on businesses from the Corporate Affairs Commission (CAC), the Nigeria Customs Service, other third parties and routine visits to premises of suspected non-registered taxpayers in order to ensure that all companies and individuals who fall under FIRS’ tax jurisdiction are properly registered. In some cases, information in this regard can be obtained from other FIRS departments who may alert the Tax Audit Processes and Policies Department on the need to carry out registration checks regarding certain companies and individuals who are outside the FIRS tax net.
At the end of each registration audit, companies and individuals found to be outside tax net are usually registered and given Taxpayer’s Identification Number, and a Permanent Note Jacket file is opened
2. Advisory Audits – A visit to newly established businesses advising them of their obligations in terms of tax types, filing of declarations, payment of amounts due, records to be maintained and likelihood of audit if it is considered to be a risk and the sanctions that might apply for non-compliance. Obtaining information on newly registered companies from CAC and visiting their offices to advise them of their obligations under the law.
3. Record Keeping Audits – A check on enterprises that may have a reputation of not keeping adequate records. The visit would point out the obligations of the taxpayer as provided for in the CITA Section 63 regarding the keeping of records. Penalties are to be computed in line with CITA Section 92.