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AN EMPIRICAL STUDY ON TAX AUDIT AND INVESTIGATION IN NIGERIA

CHAPTER ONE

1.0     INTRODUCTION

  • BACKGROUND TO THE STUDY

Taxation is as old as the system of government. It has been in operation from time memorial. The genesis of taxation is dated to Bible age. According to the Holy Bible: Genesis 11:3-4 “And they said one to another, Come let us make brick, and burn them thoroughly, And they said, come, let us build ourselves a city and a tower, whose top may reach unto heaven”. Despite resistance, tax is still in force due to its divine origin. Also in the book of Exodus 30:3-16, God told Moses, “Everyone included in the census must pay the required amount of money weighed according to the official standard”. In teachings of Jesus Christ, the Leader of Christianity, in Matthew 22:11, Christians are enjoined to “give unto Caesar what belongs to Caesar”.

According to Fasoto (2001), the Federal Government of Nigeria is responsible for revenue collection and revenue allocation for development programmes at the three levels of government in Nigeria. The Federal Inland Revenue Service (FIRS) is responsible for administering Federal Government taxes in Nigeria. The body has the responsibility and power of administration and collection of the following taxes: Value Added Tax (VAT), Companies Income Tax, withholding tax on companies, residents of Federal Capital Territory (FCT), Abuja and non-residents individuals, petroleum profit tax, education tax, and capital gains tax (CGT) on residents of the Federal Capital Territory (FCT), Abuja, bodies corporate and residents of the FCT, Abuja.

The Federal Inland Revenue Service is also charged with the responsibility of collecting Personal Income Tax in respect of members of the armed forces, of the Federation, Nigeria Police Force, residents of the Federal Capital Territory (FCT), Abuja and staff of the Ministry of Foreign Affairs and non-resident individuals. The Federal Inland Revenue Service (FIRS) powers are backed up by Acts.

The Federal Inland Revenue Service (FIRS) is the operational arm of the Federal Board of Inland Revenue (FBIR). The Federal Board of Inland Revenue was established under section 4 of the Companies Income Tax Act (CITA) No 22 of 1961. The Federal Inland Revenue Service was established when the Finance (miscellaneous taxation provisions) Act No 3 of 1993. According to the Company Income Tax Act cap 60 LFN 1990, “The due administration of this Act and tax shall be under the care and management of the Board who may do all such things as may be deemed necessary and expedient for the assessment and collection for the tax and shall account for all amounts so collected in a manner to be prescribed by the minister”, the duties of the Board is stated.

According to Dalton (2016), tax is a compulsory contribution imposed by a public authority, in respect of the exact amount of service rendered to the taxpayer in return. Ayodele (2004) defined tax as a compulsory levy imposed by the government authority through its agents on its subjects or his property to achieve some goals. Ogundele (2009) believed tax must be a compulsory payment to a government for a common benefit with a known formula to a known and distinctive beneficiary i.e. federal, state and local governments.

From the above definitions of tax, it has been established that tax primarily function is to raise revenue to finance government’s expenditure. Also tax is useful in re-distribution of income and wealth and reflect other social and political objectives. Taking a closer look, it is established that the basic philosophy of taxation is embedded in the reason for the existence of government. This means that a human being living in a society cannot alone provide some facilities for himself like defenses, roads, law and order and many more. Government exists to provide a collective service for the benefit of all. Taxation is therefore the price of the social contract between the governed and the government.

Tax can be divided in two that is direct tax and indirect tax. Over the years, ways of distinguishing the two have been provided by scholars. Mill (2009) believed the only way to distinguish between the two types of tax (direct and indirect) was in terms of the incidence of taxation, in this respect, he established that when the incidence of a tax rests upon a person who bears its impact. Taylor (1968) opined that “ The term Direct and Indirect Taxes are finally distinguishable in meanings of only in terms of shift ability. Thus, he established that Direct taxes are not shifted while Indirect taxes are shifted.

The Federal Inland Revenue Service is divided into various sections to effectively carry out the enormous tasks for which it was established. The department are assessment, collection, petroleum, tax audit and investigation, legal, personnel management, finance and supply and planning, research and statistics Departments.

Tax Audit and Investigation is a section or department handles back-duty investigation, wrong and doubtful information and suspected returns, the section ensures correct assessment of taxpayers. It is a department set up to examine and ensure that the taxes are correctly assessed, duly collected and promptly remitted to public treasury. Naiyeju (1996), believed Tax Audit and Investigation seek to implement the tax laws fairly, faithfully, firmly and equitably, irrespective of the status of the persons and organizations concerned or the nature of goods and services involved.

Ige (1989), established Product Tax and Revenue Theory, which dwells more on demand and supply elasticity. He explained that demand and supply response to various fiscal regimes, he opined that firms reactive to different tax regime, depend on the alignments of its inputs. Hihingan(1995), identified taxation as the most effective instrument of fiscal policy for the stabilizations and development purposes among the under-developed economies. Kuewumi(1995), opined that the structure of tax system influence of a multiple way the nature and quality of compliance since tax structure determines taxpayers, responses through its capacity to investigate people to handover their private resources to the states in form of social contributions.

The primary goal of Tax Audit and Investigation is to ensure that tax computations by taxpayers are accurate. Therefore, an investigation would not be conducted where the Tax Authorities carry out assessments when there are administrative challenges or complexity, challenges faced are administrative and compliance challenges, lack of equity, identification of taxpayer falsification of records and information to mention a few. Tax Audit and Investigation plays an important role in restoring macro-economic balance and in determining the effective tax system.

Finally, Ogundele(1999), emphasized the importance of Tax Audit as a means of ensuring compliance with tax laws. He argued that a tax auditor does not necessarily need a chartered accountant, but the person must have a good grasp of accounting. He believed that Tax Audit is not supposed to be an open-ended affair. He believed that Tax Investigations is as a result from tax evasion and fraud, suspicion and investigations should properly train.

  • STATEMENT OF THE PROBLEM

In Nigeria, the rate of tax evasion is high. According to a paper presented by a director in the Federal Inland Revenue Service in 1981, he said that tax is abhorred by majority of people in Nigeria. Nigeria is rated even among the developing countries as one of the countries with the lowest rank in voluntary compliance. For there to be voluntary compliance, a good tax administration must be put in place. One of the major problems of taxation in Nigeria is weak administrative machinery.

Another problem of taxation is the ambiguity of tax laws in Nigeria. For there to be voluntary compliance, tax laws must be simplified in order to prevent tax payers from evading tax due to ambiguity of the provisions of the tax laws. This is the reasons why there is a need for self-assessment system and then the establishment of administrative machinery of Tax Audit and Investigation.

 

 

  • OBJECTIVES OF THE STUDY

The objectives of the study are:

  1. i) To show that Tax Audit and Investigation is an important aspect in the computation of tax accurately.
  2. ii) To show that Tax Audit and Investigation is a means of ensuring voluntary compliance of payment of tax.

iii)     To examine whether Tax can be used exclusively to achieve all desirable social goals.

  1. iv) To examine whether there is any positive effect on the introduction of self assessment to the complexity of income tax administration.
  2. v) To show the workings of the Tax Audit and Investigation introduced by the government and tax evasion.
  • SIGNIFICANCE OF THE STUDY

This research looks Tax Audit and Investigation as a means of ensuring tax compliance. Tanzi (1987), pointed out how extremely Tax Audit and Investigation is and stating the roles it plays in the restoring of macro-economic balance and in determining the real or effective tax system. The importance of the study is to reveal the way by which the government can generate more revenue from tax.

  • RESEARCH QUESTIONS / HYPOTHESIS.

The following are the research questions and hypotheses:

  1. Is there a link between Tax Audit, Investigation and Tax evasion?

HYPOTHESIS

Ho: There is a link between Tax Audit , Investigation and Tax e     evasion.

H1: There is no link between Tax Audit, Investigation and Tax evasion.

  1. What are the effects of Tax Audit and Investigation on voluntary compliance by taxpayer?

HYPOTHESIS

Ho : Tax Audit and Investigation has no effect on voluntary compliance by taxpayers.

H1:    Tax Audit and Investigation has effect on voluntary compliance by taxpayers.

iii)    What effect does self-assessment have on voluntary compliance and complexity of desirable income tax administration?

HYPOTHESIS

Ho : Self-assessment does not have an effect on voluntary compliance and complexity of desirable income tax administration.

Hl : Self-assessment has an effect on voluntary compliance and complexity of desirable income tax administration.

  1. Can Tax Authority use Tax exclusively to achieve all desirable social goals?

HYPOTHESIS

Ho: Tax cannot be used exclusively to achieve all desirable social goals.

Hl : Tax cannot be used exclusively to achieve all desirable social goals.

  1. If inducements are being given to FFIRS staff, can they be encouraged to be productive on their job?

HYPOTHESIS

Ho : Inducements to FIRS staff cannot make them to be more productive on their job.

Hl : Inducements to FIRS staff can make them to be more productive on their job.

1.6     RESEARCH METHODOLOGY

The study is being carried out in two states which is Ekiti State and Lagos State in the south-western geo-political zone of Nigeria. The population for the study consists of the stakeholders of tax administration such as 220 tax collectors, 600 staff of Federal Inland Revenue Service (FIRS), 180 tax consultants and over 1500 tax payer. This makes the total number of population to be put to 2500. The sample size of 250 will be put in use, 60 staff of Federal Inland Service , 18 tax consultant, 22 tax collector, and 150 tax payers. Questionnaires will be administered to the study sample.

  • SCOPE AND LIMITATIONS OF THE STUDY

The limitations of this study is time and financial constraints.         Due to the two constraint mentioned, the project is limited to two states in the south-west geo-political zone. Also, the study is limited to some selected individuals who are randomly selected. The study is restricted to tax collectors, tax payers, staff of Federal Inland Revenue Service and tax consultant. Limited access to information is also a limiting factor.

  • DEFINITION OF TERMS

Acts: These are laws formulated and used to govern the Federal Republic of   Nigeria. They are laws formulated by the legislature and passed into law.

Administration: This has to deal with care and management.

Inducement: This means of welfare packages used to motivate people to perform more.

Revenue:- This is the total income received by the government.

Public Treasury: This is called the people’s fund. This is also known as the Federation Account.

Self Assessment: This is the process where taxpayers calculate the tax expected to be paid by them.

Tax Payers: These are individuals, corporate and partnership who pay tax.

  • ORGANISATION OF THE STUDY

This chapter looks into the introductory aspect of Tax Audit and Investigation in Nigeria. Terms such as tax, tax audit, voluntary compliance, tax evasion and tax investigation were also defined briefly. Problem as weak administrative machinery and ambiguity of tax laws in Nigeria were also identified. Also what the project hopes to achieve was identified, showing the link between tax audit, tax investigation and tax evasion and also ensuring voluntary compliance.

 


END OF CHAPTER REFERENCES

Adegboyega, A.J (1998) “Analysis of Taxation Principles for Nigerian Students” J.A Adejuwon & CoLtd, Lagos.

 

Adom, D.(2010) “Successfully handling Tax Investigations”, The Tax Practitioner Vol 1, pp15-24.

 

Ayodele, A.L(2004) “Principles and Practice of Nigerian Personal Income Tax” El-Toda Lagos.

 

Owojori, A(2006) “Towards improving Tax Audit and Investigation in Nigeria”,        The Nigerian Accountant April/June.

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Updated: June 13, 2017 — 3:52 pm

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