Tax Audit And Tax Liability: What You Should Know

Welcome to another Tax Thursday!

If you have been following our publications, today’s topic is something you are already familiar with. However, if you are a new reader, you can check up on our previous posts, link will be attached at the end of this write-up.  On today’s edition, we will be talking about tax audit and tax liability.

What is Tax Audit?

Tax audit is a process whereby tax returns filed by taxpayers are assessed in accordance with the provisions of the law. A tax audit involves an examination of a taxpayer’s tax returns to establish that the financial information at the base of the tax returns is reported correctly and completely. Under the self-assessment regime, taxpayers are expected to file returns monthly, quarterly, and yearly depending on the nature of taxes being filed. The taxpayers must wilfully declare taxes and file returns with the FIRS.

The three stages of tax audit as explained by FIRS are;

  • Pre-Audit Stage: this the planning stage and it is done within the FIRS premises. It involves the following activities: selecting taxpayers, notifying taxpayers of audit exercise, and selecting tax audit teams.
  • Field-Audit Stage: this is carried out in the premises of the taxpayer by the tax authority, and it signifies the beginning of the audit process. It is a detailed examination of the taxpayer’s file; the tax authority compares the accounts filed by the taxpayer at their office with the source document in the taxpayer’s premises. 
  • Post-Audit Stage: this consist of collection and appeal procedure which is not part of the audit cycle and includes among other things: payment objections and appeals by taxpayers based on the provisions of tax laws.

Tax Audit is important for a number of reasons, some of which are to; ascertain the level of taxpayers compliance with the various provision of the tax laws, ascertain if the taxpayers filed accounts agrees with its source documents, to provide an avenue to educate the taxpayers on the various provisions of the tax laws, and to identify any form of tax evasion, base erosion, and profit shifting, so as to identify ways to curb it.

What is Tax Liability?

Tax Liability is the total amount of tax debt owed by an individual, cooperation, or entity to the tax authority, in this case, the FIRS. Taxes are imposed by a variety of taxing authorities, including federal, state, and local governments, which use the funds to pay for services such as repairing roads and defending the country. Forms of tax liabilities include; income tax, sales tax, and capital gains tax.

How To Avoid Tax Liabilities

  1. Ensure that proper accounting records are always maintained
  2. Ensure that a standard fixed assets register, and evidence of fixed assets purchased such as receipt from suppliers are maintained.
  3. Ensure that valid Tax invoices are always issued to customers to avoid sanction as provided in Section 29 of the VAT Act (Cap V1, LFN 2004 as amended).
  4. Ensure that the taxpayers maintain a good accounting software
  5. Ensure that sufficient and appropriate evidence and explanation are given during desk audit.
  1. Ensure that total bank lodgements are reconciled to the total turnover reported in the account, to guide against additional VAT that might be raised on the company during tax audit.
  2. For Company whose customers deduct WHT from their invoices, ensure that all receipt of WHT deducted for the period are collected on time as it can be used by the company to reduce the Companies Income Tax raised on the company during the audit.
  3. On receiving a tax audit letter from the service, adequate preparation should be made by the company or the tax consultant of the company on how to tackle any grey areas in the account and obtaining sufficient evidence to support the company’s position on that issue.
  4. Ensure that all evidence of VAT and WHT remitted during the period under review are made available.

We at Taxaide understands how cumbersome tax processes can be, and that is why we have taken it upon ourselves to simplify and automate the processes and provide advisory services.

Our services include but not limited to;

  • Audits and Investigations Management
  • Corporate Income Tax Management
  • Payroll Management
  • Personal Income Tax Management
  • Value Added Tax Management
  • Withholding Tax (Payables and Receivables) Management, and others.

For enquires send an email to; contact@taxtech.com.ng or call 0700TAXAIDE

To read up on previous publications, please visit; https://taxaide.com.ng/my-blog/