Understanding FIRS Tax Audits: Crucial Insights

Overview of the FIRS

The Federal Inland Revenue Service (FIRS) is a government body in Nigeria responsible for administering and collecting taxes from registered companies, whether based in Nigeria or offshore, that generate revenue within the country. All registered companies are mandated to file relevant tax returns and remit taxes, including Corporate Income Taxes and Transactional Taxes, to the Federal Government through the FIRS.

Insights into Tax Audits:

A tax audit is a meticulous process where tax returns submitted by taxpayers are evaluated in accordance with legal provisions. This scrutiny involves examining a taxpayer’s financial information to ensure accurate and comprehensive reporting in their tax returns. Under the self-assessment regime, taxpayers are required to file returns periodically, and they must voluntarily declare and file taxes with the FIRS.

To assess compliance, the FIRS employs various methods, including:

1. Desk Audit: Reviewing monthly or annual documents submitted to the tax authority in line with tax laws.
2. Field Audit: Directly examining submitted documents and questioning the taxpayer on-site.

Stages of the Tax Audit Process

A typical tax audit unfolds in three stages:

1. Pre-Audit Stage: Involves planning, taxpayer selection, notification, and assembling audit teams.
2. Field Audit Stage: Conducted at the taxpayer’s premises, initiating the audit cycle. The cycle concludes with the issuance of assessments and demand notices.
3. Post-Audit Stage: Encompasses collection and appeal activities, addressing payments, objections, and appeals based on tax laws.

Major Audit Triggers and Risks for Taxpayers

Several factors can trigger a tax audit or pose risks to taxpayers:

1. Significant fluctuations in assessable profits.
2. Capital allowance and unutilized capital allowance claims.
3. Value Added Tax (VAT) and Withholding Tax (WHT) refund claims.
4. Large deductibility claims (e.g., bad debts provision or write-offs).
5. High expenses-to-revenue ratio.
6. Related party transactions.
7. Restatement of Audited Financial Statements.
8. Business restructuring, mergers, and acquisitions.
9. Double taxation agreement claims.
10. Unreported revenue and inconsistent information between Audited Financial Statements (AFS) and tax returns.

Key Documents During FIRS Audits

Taxpayers must be prepared to provide essential documents during FIRS audits:

1. The Company’s Audited Financial Statement.
2. Trial Balance.
3. Bank Statements.
4. Revenue Ledger.
5. Direct Cost Ledgers.
6. OPEX + CAPEX Ledgers.
7. Related Parties Ledger (if applicable).
8. Supporting Payment Ledgers.
9. Relevant tax returns filed with the FIRS.
10. Evidence of remittances.

These documents play a vital role in ensuring transparency and compliance during FIRS tax audits, with the specific requirements varying based on the nature and type of the company’s business.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.