For those who have been following our publications, the topic of today’s discussion may sound familiar. However, if you are a new reader, you can catch up on our previous posts; a link will be attached at the end of this write-up. In this edition, we delve into the realms of tax audit and tax liability.
What is Tax Audit?
Tax audit is a meticulous process where taxpayers’ filed tax returns undergo assessment in accordance with legal provisions. This examination ensures that the financial information forming the basis of the tax returns is accurately and comprehensively reported. Under the self-assessment regime, taxpayers are required to regularly file returns, be it monthly, quarterly, or yearly, depending on the nature of taxes involved. This filing must be a voluntary and truthful declaration of taxes with the Federal Inland Revenue Service (FIRS).
The three key stages of tax audit, as elucidated by FIRS, are:
- Pre-Audit Stage: This involves planning within the FIRS premises, including activities like selecting taxpayers, notifying them of the audit, and forming tax audit teams.
- Field-Audit Stage: Conducted at the taxpayer’s premises by the tax authority, this marks the commencement of the audit process. It involves a thorough examination of the taxpayer’s file, comparing the filed accounts with source documents on-site.
- Post-Audit Stage: This stage encompasses the collection and appeal procedure, extending beyond the audit cycle. It includes processes such as payment objections and appeals by taxpayers, aligned with the provisions of tax laws.
Tax audits are crucial for various reasons, including ensuring taxpayers’ compliance with tax laws, validating the alignment of filed accounts with source documents, educating taxpayers on tax law provisions, and detecting any potential tax evasion, base erosion, and profit shifting to formulate preventive measures.
What is Tax Liability?
Tax liability refers to the total amount of tax debt owed by an individual, corporation, or entity to the tax authority, specifically the FIRS. Various taxing authorities, including federal, state, and local governments, impose taxes to fund essential services such as road repairs and national defense. Types of tax liabilities encompass income tax, sales tax, and capital gains tax.
Tips to Mitigate Tax Liabilities:
- Maintain meticulous accounting records consistently.
- Keep a standardized fixed assets register and evidence of fixed asset purchases.
- Issue valid tax invoices to customers to avoid sanctions.
- Implement reliable accounting software.
- Provide sufficient evidence and explanations during desk audits.
- Reconcile total bank lodgments with reported turnover to prevent additional VAT assessments.
- For companies with customers deducting WHT, ensure timely collection of all deducted WHT to offset Companies Income Tax during audits.
- Upon receiving a tax audit letter, adequately prepare to address any grey areas in the accounts, backed by sufficient evidence.
- Make all evidence of VAT and WHT remittances available during the audit period.
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.
