EFFECT OF TAX AUDIT AND INVESTIGATION ON REVENUE GENERATION IN NIGERIA CASE STUDY OF FEDERAL BOARD OF INTERNAL REVENUE SERVICE (LAGOS IRS ANNEX OFFICE)
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EFFECT OF
TAX AUDIT AND INVESTIGATION ON REVENUE GENERATION IN NIGERIA CASE STUDY OF
FEDERAL BOARD OF INTERNAL REVENUE SERVICE (LAGOS IRS ANNEX OFFICE)
CHAPTER ONE
INTRODUCTION
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.
1.3.
OBJECTIVES OF THE STUDY
The main
objective of this study is to assess the effects of tax audit and investigation
on revenue generation in Federal Inland Revenue Service (Nigeria).
This study
aims at achieving the following specific objectives:
To investigate if there is any significant
relationship between revenue base of the government and tax audit and
investigation in Nigeria.
To investigate, if tax audit and
investigation can aid in resolving the problem of tax evasion in Nigeria.
Identify specific methods FIRS uses to
audit taxpayers.
Determine the effect of Computer Aided
Audit Tools ( CAAT) on Revenue
generation in FIRS.
Ascertain the extent to which tax payers
may have complied with the relevant statutory provisions of the tax law.
1.4.
RESEARCH QUESTION
The
following questions were asked to guide the research study:
Are there any significant relationship
between revenue base of the government and tax audit and investigation in
Nigeria?
To what extent can tax audit and
investigation aid resolving of the problem of tax evasion in Nigeria?
What are the specific methods FIRS uses to
audit and investigate taxpayers.
What are the effects of Computer Aided
Audit Tools (CAAT) on Revenue
generation in FIRS?
Are there any extents to which tax payers
may have complied with the relevant statutory provisions of the tax law?
1.5.
HYPOTHESIS FORMULATION
To enable
the researcher test if there is any effect of tax audit and investigation on
revenue generation by FIRS; some statistical model will be used based on the
responses from oral interview carried out and the questionnaires distributed
and also statistical data generated from the appropriate sources. The data
generated from all these will be used to test the following hypothetical
statements. In order to guide the study the following hypotheses were
formulated:
Hypothesis
1:
HO: Tax
audit and investigation does not have significant effect on revenue generation
in Federal Inland Revenue Service.
Hypothesis
2:
Ho: There is
no significant relationship between the increase in the revenue base of the
government and tax audit and investigations in Nigeria.
Hypothesis
3:
Ho: There is
no significant relationship between probability of being audited and tax
compliance by taxpayers.
1.6.
SIGNIFICANCE OF THE STUDY
One of the
most frequently discussed issues in Nigeria is how to solve the economic
hardship in the country and how to create an industrial base that can guarantee
self sustaining economic development. Also one wonders why a country which is
richly endowed with the necessary human and material resources and which the
people pay tax has been turned a heavily indebted country.
The study
will afford us the opportunity to the concept and theory of tax
audit/investigation and it roles on revenue mobilization, and the various means by which government has
been using tax to generated revenue, and the important role of taxation in
drawing the development agenda and planning the economy of the country.
The study
will analyze the tax reform, policy and administration framework, as well as
the significance and application of the tax audit and investigation. This would
enable the various stakeholders of the tax administration and enforcement,
namely the FIBR, SBIR, taxpayers and the government to get a better
understanding of the role of the tax audit and investigation, and to contribute
to its successful implementation/adoption.
The study
will also put forward relevant recommendations on improvements that could be
made on the current practice of tax audit and investigation. The study will
also provide an assessment of the transparency and integrity in carrying out
the tax audit process in its current state. It will provide a clear picture of
the level of efficiency and effectiveness of the existing tax
audit/investigation practice in the Federal Inland Revenue Service in the Lagos
Metropolis. The findings may also serve as a good reference source for further
research into the tax audit.
It will also
be useful to the member of the Chartered Institute of Taxation of Nigeria
(CITN) who may wish to use it for future research and to the student, and
researchers for further research study on the theory of tax audit and
investigation.
1.7. SCOPE
OF THE STUDY
The scope of this study covers critical
examinations on the effect of tax audit and investigation on revenue generation
in Nigeria. It will also analyze other related issues such as structure and
administrative machinery of tax mobilization in Nigeria and their associated
problems. It shall also covers the issue of non-compliance by potential
taxpayer which directly result in tax evasion or avoidance.
The essence
of this digression is to possibly find out the obstacles if any, that hinder
the effective collection and administration of tax in the country.
This study
analyzes the tax audit practice in the Lagos Metropolis in respect of the
Nigeria Federal Inland Revenue Service, also cross section of some potential
tax payers were considered in the study. This study also considers the practice
and its application in the SIBR of the FIRS, thus the scope may be somehow
limited.
The Lagos
State Region is a very geographical representative of the large population of
Nigeria. Its inhabitants represent a large percent of the economic, business
and financial activities in the country. It is therefore supposed that this
study illustrates the tax audit and investigation practice and its general
effect in improving revenue collection in the country.
1.8.
LIMITATION OF THE STUDY
Firstly,
even though the study is intended to capture all the tax administration
procedures, available data on tax auditing exists only for the operations ran
by the Lagos Internal Revenue Service therefore information gathered for this
study came mostly from the LIRS, which is just one unit of the countries
revenue authority. However, it is believed that the outcomes and conclusions
are relevant to the work of the FIRS.
Additionally,
most tax payers were unwilling to provide information about the study since
most believed that the result of a tax audit and investigation on their books
and tax payment was confidential and therefore were not very willing to provide
all or the relevant information needed for the project.
Finally,
some respondents were not keeping proper records of their business activities
and therefore could not give adequate and correct information on the effect of
taxation on their business activities and the rippling effect of tax audit and
investigation on the economy of Nigeria.
1.9.
DEFINITION OF TERM
1. Tax: A
compulsory levy by the government on its citizens for the provision of public
goods and services.
2. CITA:
(Company Income Tax Act) it is a Federal Law operated by the FIRS, which deals
with the taxation of all limited liability companies in Nigeria with the
exception of those engaged in petroleum operations.
3.
Persons/tax payers: It includes all taxable persons be it individual or corporate
bodies.
4. Tax
Audit: 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. Adesina (2005) defined an Audit as the examination of
accounting documents and of supporting evidence for the purpose of reaching an
opinion concerning their propriety.
5. Tax
reform is the process of changing the way taxes are collected or managed by the
government and is usually undertaken to improve tax administration or to provide
economic or social benefits.
6. Tax
Evasion: Tax evasion is a deliberate and wilful practice of not disclosing full
taxable income so as to pay less tax.
7. Tax
Avoidance: Tax avoidance has been defined as the arrangement of tax payers’
affairs using the tax shelters in the tax law, and avoiding tax traps in the
tax laws, so as to pay less tax than he or she would otherwise pay
8. Non-Compliance: can be defined as the failure
on the part of a taxpayer to correctly file returns, report actual income,
claim the correct deductions, reliefs and rebates and remit the actual amount
of tax payable to the authority on time.
9. Desk (or
Office) Audit
This is one
which the whole activity of the audit takes place within the confines of the
office of the tax officials
10. Field
Audit
By the
nature and scope of their work, regular assessing officers can only carry out
limited desk audit through examination of accounts and returns
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