1.1 Introduction
Tax audit can be defined as an examination of an individual or organization’s tax report by the relevant tax authorities in order to ascertain compliance with applicable tax laws and regulations of state. Tax compliance is an ability of a tax liable body to submit accurate, complete and satisfactory returns in conformity with tax laws and regulations of the state to the authority for the purpose of tax assessment (Kircher 2008). Tax evasion is situations where tax liability is fraudulently reduced or false claims are filled on the revenue tax form (Fagbemi et al., 2010). A tax is a compulsory levy by government through its agencies on the income, consumption and capital of its subjects. These levies are made on personal income such as salaries, business profit, interest, dividend, discount or royalties to obtain revenue.
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitations of the Study and Definition of technical terms.
1.2 Background of 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.
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. 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.
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).
Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Impact of Tax Audit on Tax Evasion and Avoidance in Ekiti State.
1.3 Statement of Problems
Investigation revealed that 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.
1.4 Aim and Objectives of Study
The aim of the study is to examine the Impact of Tax Audit on Tax Evasion and Avoidance in Ekiti State using Ekiti State Internal Revenue Service as a case study. In achieving this aim, the following specific objectives were laid out as follows:
- To investigate if there is any significant relationship between tax evasion, avoidance and audit in Nigeria;
- To determine if tax audit and investigation can aid in resolving the problem of tax evasion in Nigeria;
- To identify specific methods Ekiti State Internal Revenue Service uses to audit taxpayers; and
- To ascertain the extent to which tax payers may have complied with the relevant statutory provisions of the tax law.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- Can tax audit and investigation aid in resolving the problem of tax evasion in Nigeria?
- Are there any significant relationship between tax evasion, avoidance and audit in Nigeria?
- What are the specific methods Ekiti State Internal Revenue Service uses to audit taxpayers?
- What is the extent of tax payer’s compliance with the relevant statutory provisions of the tax law?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: Tax audit and investigation does not have significant effect on revenue generation in Ekiti State Internal Revenue Service.
- H1: Tax audit and investigation has significant effect on revenue generation in Ekiti State Internal Revenue Service.
Hypothesis Two
- H0: There is no significant relationship between probability of being audited and tax compliance by taxpayers.
- H1: There is significant relationship between probability of being audited and tax compliance by taxpayers.
1.7 Significance of Study
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 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. 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 theory of tax audit and investigation.
1.8 Scope of Study
The scope of the research is focused on the Impact of Tax Audit on Tax Evasion and Avoidance in Ekiti State using Ekiti State Internal Revenue Service as a case study.
1.9 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
- Research material: availability of research material is a major setback to the scope of the study.
- Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.10 Definition of Terms
Tax: A compulsory levy by the government on its citizens for the provision of public goods and services.
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.
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