Understanding Tax Compliance Requirements And The Tax Audit Process

Introduction to Tax Compliance

Tax compliance is about complying with the tax laws and regulations outlined by government entities, ensuring timely and accurate reporting and payment of taxes. This compliance is vital not only for the financial health of the economy but also for the legality of both individual and business activities. In today's complex regulatory environment, achieving consistent tax compliance has become more crucial than ever.

Essential Elements of Tax Compliance

• Accurate Calculation: Taxpayers must ensure that all taxable income and allowable deductions are reported accurately.
• Timely Submission: Tax returns and related documents must be filed within the prescribed deadlines.
• Prompt Payment: All tax liabilities, including PAYE (Pay As You Earn), CIT (Corporate/Company Income Tax), and CGT (Capital Gains Tax), must be paid promptly.
• Record Keeping: Detailed records must be kept to support future audits or inquiries.
• Transparency: Legal obligations should be met honestly and without any attempt to evade taxes.

Various Taxes to Comply With

Taxpayers are expected to comply with various taxes, including Company Income Tax (CIT), Personal Income Tax (PIT), Capital Gains Tax (CGT), Value Added Tax (VAT), Petroleum Profit Tax (PPT), Education Tax and Stamp Duties.

Who Should Comply?

Compliance is a shared responsibility. Taxpayers are required to file accurate returns and make payments on time. Meanwhile, tax authorities are tasked with ensuring compliance and fairness through diligent audits and effective oversight.

Tax Compliance Requirements

• Registration and Identification: Every taxpayer is required to obtain a Tax Identification Number (TIN) and register for VAT. Compliance with other applicable taxes such as Consumption Tax is also mandatory. (See Regulation 1 of the PAYE Regulations.
• Filing Tax Returns: File tax returns as required, providing complete and accurate information. (Relevant sections include S. 81(2) Personal Income Tax Act (PITA) 2004 as amended for employers, S. 41 PITA for individuals, and S. 55 Company Income Tax Act (CITA) for companies).
• Payment of Taxes: Taxes must be paid promptly, within the timeframes specified by the relevant laws (e.g., S. 68 PITA and S. 77 CITA).
• Record Keeping: It is essential to maintain accurate financial records, which are required under Section 52 PITA and S. 63 CITA, with penalties for non-compliance being N50,000 for individuals and N500,000 for corporate entities.
• Withholding and Reporting: Taxes must be withheld on various withholding tax payments such as withholding taxes on rent, interest, dividends, director's fees, contract and other forms of taxes deducted at source as mandated by Sections 69–73 PITA and Sections 78–81 CITA, and promptly remitted to the tax authorities.
• Audit and Review: Taxpayers should cooperate with audits and provide all necessary documentation to authorities, facilitating a transparent review process.

Importance of Tax Compliance

Tax compliance is vital for several reasons:

• Revenue Collection: It ensures the government has the necessary funds to provide public services like education and healthcare, which are crucial for societal well-being.
• Legal Obligation: Meeting tax obligations is a legal requirement. Non-compliance can lead to penalties or even criminal charges, emphasizing the importance of adhering to tax laws.
• Equity and Fairness: Ensures all taxpayers contribute fairly, maintaining trust in the system.
• Avoidance of Penalties: Staying compliant helps avoid fines and interest that accrue from late filings or underpayments

Implications for Non-Compliance

The consequences of failing to comply with tax laws are significant and can include:

• Penalties and Fines: Non-compliance attracts hefty fines.
• Interest on Unpaid Taxes: If taxes are unpaid, the interest that accumulates can significantly increase the total tax liability.
• Criminal Charges: In cases of severe non-compliance, individuals or businesses may face fraud charges that could lead to fines or imprisonment.
• Audit and Scrutiny: Non-compliance often triggers audits, which can be intrusive and disruptive.
• Reputation Damage: For both businesses and individuals, non-compliance can severely damage reputations, affecting personal and professional relationships and public perception.
• Restrictions on Financing: Many financial institutions often require proof of tax compliance when issuing loans, and failure to provide this can restrict access to necessary financing.

Tax Audit Process Overview

A tax audit is a detailed process conducted by tax authorities to ensure that taxpayers correctly report and fulfill their tax obligations. Guided by specific legal provisions, this process involves reviewing tax returns and financial documents to verify accuracy and compliance. In Nigeria, the authority for such audits is granted by Sections 47 and 53 of the Personal Income Tax Act (PITA) and Sections 60 and 64 of the Companies Income Tax Act (CITA), which empower tax authorities to determine the proper tax amounts due. The processes are as follows:

1. Selection for Audit:
   
   • Random Selection: Taxpayers may be chosen randomly using statistical algorithms to ensure a fair selection process.
   • Computer Screening: Returns that show anomalies or deviations from norms, as identified by automated systems, may be flagged for audit.
   • Related Examinations: If a taxpayer is involved in transactions with another party currently under audit, they may also be selected for an audit.
2. Notification:
   
   • Taxpayers are formally notified of their selection for an audit, which specifies the tax years under review, the audit type, and the particular issues or items being examined.
3. Preparation:
   
   • Taxpayer: Individuals or businesses should gather all pertinent documentation, such as receipts, ledgers, invoices, contracts, and previous tax returns. Consulting a tax professional is often beneficial.
   • Auditor: Auditors review the returns in question and prepare specific questions and areas to focus on during the audit.
4. Conducting the Audit:
   
   • Field Audit: An auditor may visit the taxpayer's place of business, home, or the office of a designated representative, such as an accountant.
   • Office Audit: Taxpayers may be required to bring specific documents to an IRS office or its equivalent in other countries.
   • Correspondence Audit: Some audits are conducted entirely through the mail, where taxpayers send copies of requested documents.
5. Review and Findings:
   
   • Auditors review all the documentation and information provided. If discrepancies are identified, adjustments to the tax return may be necessary. This process can involve multiple meetings or exchanges of correspondence.
6. Audit Outcomes:
   
   • No Change: If the audit finds that all tax reports are accurate, it concludes without any changes.
   • Consensus Reached: If the taxpayer agrees with the auditor's findings, the outcome may involve a revised tax assessment, which could result in either additional tax liabilities or a refund.
   • Discrepancies Contested: Taxpayers who disagree with the audit findings have the option to request a further review or to appeal the decision.
7. Final Resolution:
   
   • The audit is resolved either through a formal appeals process or once the taxpayer accepts the findings.
8. Record Keeping:
   
   • It is crucial for both the taxpayer and the tax authority to retain records of the audit and its outcomes for a specified period for future reference.

METHODS OF SELECTING RETURNS FOR TAX AUDIT IN NIGERIA

In Nigeria, the Federal Inland Revenue Service (FIRS) and the State Inland Revenue Services (SIRS) use a variety of methods to select taxpayers for audits, aimed at increasing tax compliance and reducing evasion. These methods include:

1. Risk-Based Selection: Both FIRS and SIRS employ risk-based models to detect discrepancies such as fluctuating incomes or unusual deductions in tax filings.
2. Random Selection: This method is used to promote fairness and ensure that all taxpayers are equally auditable, reinforcing a general compliance mindset.
3. Industry-Specific Selection: Audits target industries known for higher non-compliance risks, such as those with complex financial transactions or large cash operations.
4. Third-Party Information: Audits may be initiated based on data from external sources like banks or other financial entities, which help identify non-compliance that is not apparent from tax returns alone.
5. Compliance History: Taxpayers with a history of non-compliance are more frequently audited as both a deterrent and a corrective measure.
6. Specific Projects or Campaigns: Targeted audit campaigns may be launched in response to economic developments or insights from previous audits, focusing on specific issues or sectors.
7. Data Analysis: The use of software to analyze tax returns helps identify and flag returns with anomalies or discrepancies for auditing.

These strategies collectively help FIRS and SIRS efficiently identify and audit taxpayers who are at higher risk of tax evasion or non-compliance.

Preparing for a Tax Audit

Effective management of tax-related obligations involves strategic preparation for tax audits. Here are key practices that enhance readiness and ensure compliance:

1. Maintain Accurate Records: Keep detailed records of all financial transactions, receipts, invoices, and deductions. Organized and accessible records can simplify the audit process and support the accuracy of tax filings.
2. Understand Tax Obligations: Stay informed about the latest tax laws and regulations that apply to the specific situation. Understanding these obligations can help ensure that all filings are complete and correct.
3. Timely Filing: Always file tax returns on time and pay any owed taxes by the due date. Timely filing reduces the chances of being flagged for an audit due to late submissions or payments.
4. Conduct Internal Audits: Regular internal reviews of tax filings and financial operations can identify and rectify discrepancies or errors before they become problematic, maintaining ongoing compliance and operational integrity.
5. Seek Clarifications Proactively: If there are uncertainties or new developments in tax laws that affect filings, do not hesitate to seek clarifications from tax advisors.

Conclusion

Tax compliance is more than a legal requirement- it is a crucial part of contributing to societal stability and economic growth. By adhering to tax regulations, individuals and businesses not only avoid penalties but also enhance trust within the tax system. Given the complexities of tax audits and the broader challenges of maintaining compliance, expert guidance is crucial. For further information, please contact Samuel Oyenitun.

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.