Inside Tax : Issue 26 - Ensuring a seamless tax audit exercise
Tax audits are periodic checks of the tax and accounting records of taxpayers by both Federal and State tax authorities to ensure that the correct tax returns have been filed and correct taxes paid in prior periods. The period covered does not normally exceed six years.
Panic and anxiety are common feelings that taxpayers have whenever notification for tax audit is served on them. This is also the case for multinationals and well organised entities whose tax and accounting records, one would expect to be in order. The critical question that comes to mind, therefore, is: could there ever be a time when taxpayers would look
forward to welcoming Revenue officials with open arms for a tax audit exercise? There may be need for a total mind-set overhaul by both parties in order to achieve this.
Most taxpayers believe that tax audit is only an avenue for tax authorities to scrutinize every source document, line of the accounts and tax returns with the aim of coming up with additional taxes including interest and penalty. The belief is that revenue generation is the paramount intention of the tax man and not necessarily whether the taxpayer had truly paid its fair share of taxes or not. With this in mind, some taxpayers either adopt a defensive approach or are as uncooperative as they could be.
In reality, it appears that tax authorities generally believe that there must be wilful negligence to tax somewhere and somehow by the taxpayer. With this in mind, they set out to probe even the most genuine accounting and tax transaction. Another driver of this approach by the tax man is the challenging revenue targets that must be met.
Can there really be a meeting point? How? Where?
Tax authorities are charged with the task of administering taxes, ensuring compliance to existing tax laws/regulations and generating revenue through taxes. Ideally, they also have the responsibility of providing clarifications on technical issues in case of misunderstanding by taxpayers, thereby ensuring that taxation is a comfortable terrain for such taxpayers. One of the ways by which the tax authorities monitor and ensure compliance by taxpayers is through tax audits. To win the trust of the taxpayers, tax audits should be carried out with an open mind and not with the intention of witch-hunting.
Taxpayers on the other hand are expected to comply with the provisions of the tax laws and respect the tax authorities. Every taxpayer also has the civic responsibility of paying its fair share of taxes as and when due. When this is done, tax audits would be welcomed by the taxpayers as a responsibility of the tax authorities which should be fulfilled.
In view of the foregoing, the following are some tips to ensure the taxpayers' readiness and comfort during tax audits
Examining the tax audit notification letter
Once a taxpayer has been selected by the tax authorities for audit, a letter is usually issued to the taxpayer to serve as a notification of the tax authorities’ intention to carry out an audit exercise. The taxpayer is expected to review this letter in order to identify the areas highlighted for audit and prepare accordingly. In practice, the taxpayer is allowed to request for extension of the tax audit commencement date if the proposed date of the tax audit is not feasible for the company. In many instances, tax authorities oblige these requests whenever they are satisfied that such requests are not frivolous or made with the intention to deliberately frustrate the exercise.
Engaging the services of a tax advisor for support during the exercise
If the taxpayer does not have a tax advisor for its tax function, it is advisable to engage one. Tax consultants are trained professionals who are vast in tax laws and can provide the needed support during the rigors of a tax audit exercise. The aim of tax professional is to ensure that neither the government nor the taxpayer is short-changed. They are not engaged to employ crooked means at reducing tax liabilities, but to ensure that every conclusion reached is in line with the provisions of the law. Both the tax authority and taxpayer must see the involvement of a tax advisor as a sort of professional mediator whose skills, experience and exposure would make the process more efficient. Of course, the taxpayer is the employer in this case and must be provided with every support, guidance and technical expertise that will add value to its business.
Documenting tax and accounting treatments of transactions properly
Proper documentation of company's tax and accounting transactions alleviates bulk of the headache during tax audit exercise. This is because the main interest of the tax man is checking of tax and accounting documentations to substantiate the filed tax returns for the periods covered by the review. Consequently, taxpayers are advised to ensure that copies of all documents needed to substantiate transactions are properly kept for the purpose of future tax audit exercise. Where copies of certain documents have been lost due to uncontrollable circumstances, taxpayers are advised to reach out to third parties to retrieve such documents and information. The degree of reliance that could be placed on documents should also be well understood. Third party evidence are much more acceptable to a tax auditor than internally generated schedules and analysis. It is important that transactions are properly documented with third party evidence that could be independently verified, where required
Cooperating with tax officials
Taxpayers should neither perceive tax officials as enemies nor see the audit exercise as a witch hunting exercise. Rather, taxpayers should cooperate with tax officials, give them full attention and provide all the documents and information that they may request for.
While the success or failure of the tax audit exercise lies largely on the taxpayers' ability to provide documents and information, the tax authorities also have important roles to play in driving successful tax audits. The tax authorities need to make the process of the tax audit as comfortable as possible for all parties concerned, while enlightening the taxpaying populace continuously on the aim of tax audit exercise. Further, the recent aggressive drive for revenue generation by the major tax authorities in Nigeria has raised many concerns. This drive for revenue is being perceived by most taxpayers as a misplaced priority and has created negative atmosphere during some recent audit exercises.
Increased training, exposure and capacity building
It is important for tax officials to continue to receive adequate training and exposure to enable them function effectively. Specialised industry trainings and understanding of sectoral peculiarities are critical to becoming a well-rounded tax administrator. The use of “cut-and paste” approach for generating information request list should be jettisoned. Some enquiries from tax officials during audits could easily give them away as lacking industry skills and sectoral expertise.
It must be noted that many tax authorities have devoted significant attention to capacity building and provision of resources needed for an effective and efficient tax audit exercise. Endless cycle of tax audit reconciliations is now giving way for a faster turn-around tax audit cycle. Some tax authorities are even moving to a risk-based approach for identification and selection of tax audit targets. This is a welcome development and we can only continue to look forward to a more efficient and effective process in the
In conclusion, the responsibility of ensuring a seamless tax audit exercise lies on both the taxpayer and the tax authorities. The tax authorities should continue to educate the taxpayers on their obligations as provided under the tax laws and the importance of tax audits for ensuring that the taxes due to the Revenue are accurately accounted for.