Leveraging Information Technology to Enhance Tax Audit Exercise

On 13 January 2020, President Muhammadu Buhari signed the Finance Act, 2019 into law. One of the key introductions of the Finance Act, 2019 to tax administration in Nigeria is the acceptability of electronic mail as a means of communication between axpayers and the various tax authorities. Also, recently, as a result of the COVID-19 pandemic, some State tax authorities in Nigeria have adopted the use of video conferencing as the default mode for conducting tax audit reconciliation meetings. These developments have proven the possibilities of leveraging information technology to aid faster and robust tax audit exercise that would not only increase revenue generation from taxes but also encourage taxpayers’ compliance.

This article discusses the possible ways to leverage technology in order to aid effective and seamless completion of tax audit exercises

 

Typical tax audit process

Tax audit exercise is a routine exercise carried out by tax authorities to establish the accuracy of the tax returns submitted by taxpayers. The tax audit department within the relevant tax authority is saddled with the responsibility of conducting the audit of taxpayers.

Generally, the tax audit exercise is initiated by the tax authorities by issuing a letter of notification of tax audit exercise to the taxpayers stating the proposed date of commencement of the audit and documents/ information to be provided by the taxpayers. However, taxpayers are at liberty to accept the commencement date proposed by the tax authorities or request a different date, subject to the tax authorities’ approval. Usually, tax audit exercises are conducted at the business premises of the taxpayers to allow the tax authorities the opportunity to examine all necessary documents and obtain adequate information in relation to the tax and accounting records of the taxpayers.

This stage of the tax audit exercise is commonly referred to as the field exercise. At the beginning and end of the field exercise, there is usually an opening and closeout meeting anchored by the tax authorities to communicate the objectives of and expectations from the tax audit exercise. Afterward, the tax authorities would issue a report of their findings, additional tax liability (if any), and the related assessment notice. However, taxpayers have the right to attend reconciliation meetings to provide further clarifications to the findings and object any additional tax liability and assessment with supporting documentary evidence.

Concisely, the process involved in carrying out and completing tax audit exercises could take several months to finalize, due to the various stages involved. Some of these processes are similar for all taxpayers and can be automated with the aid of technology, regardless of the period covered, size, industry, and location of the taxpayers’ business.

 

Possible ways to adopt tax audit automation 

Currently, some of the tax authorities in Nigeria have invested in creating online portals where taxpayers can access their tax information. One of such portals is the Federal Inland Revenue Service (FIRS) platform for the submission of applications for tax clearance certificates. This platform enables taxpayers to apply, process, and obtain an electronic tax clearance certificate from any location in the world. Further, the FIRS has developed a robust platform that enables taxpayers to access and download payment receipts as well as withholding tax credit notes for withholding tax deducted from their invoices.

In 2013, the FIRS introduced the Integrated Tax Administration System which was created to enable taxpayers to file their monthly and annual tax returns. Though the initiative was commended and welcomed by stakeholders, it has not resulted in any significant change and has not received the required attention for improvements that would make it the most preferred choice for taxpayers to adopt when meeting their tax compliance obligations.

Other than the recent introduction of the use of video conferencing for conducting tax audit reconciliation meetings by some states tax authorities in Nigeria, all activities that are required for the completion of a tax audit exercise by both the FIRS and State Board of Internal Revenue Services (SIRS) have always been carried out with little or no significant use of information technology.  In order to leverage technology for the conduct of tax audit exercises, the tax authorities should consider developing platforms that would enable the automated issuance of notifications of tax audits to taxpayers, conduct tax audit reviews, pre, and post-audit meetings as well as reconciliation meetings virtually, upload taxpayers’ documentary evidence, audit reports and assessments as well as minutes of meetings. Furthermore, the platform should allow taxpayers to directly submit tax audit objections and remit tax liabilities seamlessly. This is in addition to the existing possibility of exchanging information via electronic mail (email), as emails have limited capability and pose a great challenge when files and documents with huge sizes is been exchanged between tax authorities and taxpayers.

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