Tax Audit

and Investigation
Techniques
Expectations?

Aim is to match reality

with expectation

Expectation = Reality
Tax Audit To enhance expertise in conducting

effective tax audits and investigations

and while enhancing reporting skills..

Investigation
. Techniques –
Objectives
1.0 Fundamentals of Tax Auditing

TABLE OF
1.1 Introduction to Tax Audits

1.2 Objectives and types of tax audits.

CONTENT
1.3 Audit lifecycle: Planning, execution, and follow-up.

1.4 Key Skills for Effective Tax Audits, Analytical thinking,

2.0 Tax Audit Techniques

TABLE OF
2.1 Financial Statement Analysis for Tax Audits

2.2 Identifying discrepancies and potential fraud.

CONTENT
2.3 Key indicators of tax non-compliance.

2.4 Collaboration with 3rd parties (e.g., banks, suppliers).

2.5 Structuring tax audit reports for clarity and impact.

,
1.1
Introduction to Tax Audits

A tax audit is the examination of an

individual’s or organization’s financial
records and tax returns to ensure
compliance with applicable tax laws and
regulations.

Tax audits help to maintain fairness in tax

administration, improve compliance, and
generate revenue for the government.
Tax Audits - Taxes collected by the State Government

Personal Income Tax in Withholding Tax of

respect of Pay – As – You – individuals and
Earn (PAYE) and self- unincorporated companies
assessment

Capital Gains Tax of Business premises

individuals registration fees

Stamp duties on instruments

Development levy executed by individuals
Introduction to Tax Audits – Key Concepts
Definition of a Tax Audit: Types of Tax Audits:

• A systematic review of a taxpayer's records to verify 1. Desk Audit: Conducted at the tax authority’s office,

the accuracy of tax returns and compliance with tax focusing on specific documents.

laws. 2. Field Audit: Performed at the taxpayer's premises to

Purpose of a Tax Audit: examine records and systems comprehensively.

• to ensure taxpayers pay the correct amount of tax 3. Tax Investigation: Deep dive into multiple tax periods

• To detect and deter tax evasion or fraud. and all aspects of tax compliance.

• To improve voluntary compliance by creating a sense

of accountability Scope of a Tax Audit:

• All taxes administered by State

.
Introduction to Tax Audits – Triggers of Tax Audits

• Mismatched information between tax filings and third-party reports, such as bank statements or invoices.

• Large, irregular, or unexplained transactions that raise red flags.

• Income or expenses significantly deviating from industry norms or peers in the same sector.

• High-Risk taxpayer profiles as a result of frequent late filings or non-compliance history. or history of prior

underreporting or evasion.

• Inconsistent data or variations in reported income, deductions, or credits over consecutive years.

• Information provided by banks, suppliers, or regulatory agencies that contradicts the taxpayer’s filings.

• Non-filing or delayed payment of taxes triggers enforcement audits.

• Some taxpayers may be audited as part of routine or random selection by tax authorities.

• Reports from third parties, whistleblowers (e.g., employees, competitors) alleging tax non-compliance.
Introduction to Tax Audits – Triggers of Tax Audits

• Information resulting from examination, audit or investigation of other taxpayers.

• Information from Intelligence Unit of the relevant tax authority.

• Abnormal transactions or entries in the financial statements and/or tax returns e.g. prior year

adjustments.

• Qualified audit opinion by statutory financial statement auditors.

• Taxpayer or company who always render nil returns.

• Through publicly available information, representation, expenditure pattern, lifestyle etc

• Requests for large tax refunds or unusual deductions often prompt closer scrutiny
Introduction to Tax Audits – Key Responsibilities of Tax
Auditors
Tax audits are typically faced with challenges of inadequate record keeping, tax evasion, misinformation

and disagreements, tax auditors are now mandated to carry out the following responsibilities:

Verify that reported income, expenses, and deductions align with

1. Ensure Accuracy:
legal requirements.

2. Detect Non-Compliance: Identify errors, omissions, or intentional misstatements in tax returns.

3. Maintain Professionalism: Conduct audits objectively, ethically, and transparently.

4. Communicate Effectively: Clearly explain findings and requirements to taxpayers.

1.2
 Tax Audits – Objectives of Tax Audits
Ensure Tax Compliance Verify that taxpayers are complying with applicable tax laws and regulations.

Assess whether income, deductions, and credits reported are accurate and
Verify Accuracy of Tax Returns:
complete.
Detect and Prevent Tax Identify underreporting, fraudulent claims, or concealment of income to evade
Evasion: taxes.

Enhance Revenue Collection: Recover unpaid taxes, penalties, and interest to improve government revenue.

Promote Voluntary Encourage taxpayers to file accurate returns and remit taxes timely by
Compliance: demonstrating enforcement.

Assess Risk Profiles: Evaluate taxpayers' risk levels for future monitoring or audits.

Inform taxpayers about common errors and encourage better record-keeping and
Educate Taxpayers:
reporting practices.
Ensure the tax system is functioning as intended and identify areas for
Test the Tax System:
improvement in policy or enforcement.
Tax Audits – Types of Audits
Statutory Audit:
• A statutory audit is an independent examination of an organization’s financial statements to ensure they
comply with relevant laws, regulations, and accounting standards. It is conducted by external auditors
appointed by the organization.

Tax Audit / Investigation:

• A tax audit involves a detailed examination of an individual’s or entity’s tax returns, records, and transactions
to verify compliance with tax laws within the statutory timeline
• Tax investigations delve deeper, often initiated when fraud, evasion, or significant non-compliance or wilful
neglect is suspected.
• Tax audits are conducted by tax authorities regardless of the audit carried out by statutory auditors of the
financial statements before signing off. Sometimes, tax auditors may need to look beyond statutory audits
as they are answerable to a different stakeholder (i.e. the government).
 Tax Audits - Differences
Criteria Statutory Audit Tax Audit Tax Investigation

An independent review of financial A detailed examination of tax

An in-depth probe into
Definition statements to ensure compliance returns and records to verify
suspected tax fraud or evasion.
with laws and standards. compliance with tax laws.

To ensure the financial statements To confirm accuracy in tax To uncover intentional non-
Purpose present a true and fair view of the reporting and compliance with compliance, fraud, or tax
organization’s financial position. tax laws. evasion.

Conducted by external auditors as Initiated by tax authorities Triggered by significant

Initiator required by company law or based on routine checks or red irregularities or evidence of
regulations. flags in tax filings. fraud.
Not restricted and can be
Conducted within six years
Should be carried out shortly after conducted even after six years
Timeline after the expiration of a Year of
the financial year is ended of the expiration of a Year of
Assessment
Assessment
Covers all financial records and Focuses on taxable income,
Targets specific high-risk areas
Scope compliance with accounting deductions, VAT, withholding
or periods of suspected fraud.
standards. taxes, etc.
Mandatory and conducted annually Periodic or ad hoc based on the Ad hoc and often triggered by
Frequency
for certain entities. authority's discretion. unusual findings.
 Tax Audits - Differences
Criteria Statutory Audit Tax Audit Tax Investigation
Accuracy of tax Fraud detection, unreported
Accuracy of financial reporting,
computations, compliance income, and
Focus Areas internal controls, and regulatory
with tax laws, and misrepresentation of tax
compliance.
completeness of tax returns. liabilities.
Review of financial statements, Examination of tax returns, Extensive investigation,
Process supporting documents, and internal financial records, and tax including forensic analysis
controls. computations. and third-party verifications.

Tax assessment report

Audit opinion (unqualified, qualified, Legal action, fines, penalties,
Outcome highlighting liabilities,
adverse, or disclaimer). or prosecution for tax fraud.
penalties, or refunds.

Non-compliance may result in May lead to penalties, fines, Could result in severe
Legal Implications regulatory sanctions or reputational or additional tax penalties, asset seizure, or
damage. assessments. criminal prosecution.

Verifying revenue recognition, asset Checking tax deductions, Investigating hidden income,
Examples of
valuation, and compliance with IFRS VAT filings, and PAYE forged documents, or
Activities
or GAAP. remittances. offshore accounts.
Taxpayer, tax investigators,
Stakeholders External auditors, audit committee, Taxpayer, tax consultants,
forensic experts, and legal
Involved management. and tax authority officials.
authorities.
Tax Audits – Assessment
Assessment notice is issued

Assessment notice is disputed Assessment notice is not

disputed

Taxpayer objects to the assessment Taxpayer settles the assessment notice

within 30 days of receiving it. The within 60 days
objection must be addressed to the
RTA stating the precise grounds for
objection.

Where the tax authority accepts the Where the tax authority rejects The appeal may escalate to
objection, the taxpayer can settle the the objection by issuing a if either of the parties is not
revised demand notice within 30 days. “notice of refusal to amend”,, satisfied.
1
the taxpayer can appeal to the 2
Tax Appeal Tribunal (TAT)
Tax Audits
Background
Company X, a mid-sized enterprise operating in the technology sector, underwent a
statutory audit for its 2023 financial statements. During the audit, the statutory
auditors issued an unqualified opinion, indicating that the financial statements
presented a true and fair view of the company’s financial position.

Company X subsequently filed its employer tax returns for the 2023 fiscal year with the Internal Revenue Service
(IRS), declaring a total of 25 employees and remitting taxes accordingly.

Discovery by the IRS

During a routine review, the IRS came across records from one of Company X’s prominent clients, Client Y. These
records included invoices and correspondence that referred to more than 50 employees from Company X being
deployed for various projects.

Question: How do you deal with the information on the alleged discrepancy ?
1.3
 Tax Audits – Typical Cycle
1. Notification of RTA’s intent to carry out an audit.
2. List of books, documents and information to be
made available for the exercise.
3. A field audit is carried out at the taxpayer’s
office. A revisit may occur in some cases. Field
audits start with a pre-audit meeting and end
with a close-out meeting.
4. The RTA issues an initial audit report stating Audit Cycle
their findings and information not obtained
during the field audit (if any).
5. Meetings are scheduled to reconcile issues
identified and disputes or provide additional
information/explanation.
6. Assessment/re-assessments, objections, appeal
and determination.
7. Payment of additional liability, if any.
Tax Audits - Lifecycle
The tax audit lifecycle consists of three key phases:

• Planning - The planning phase lays the groundwork for a successful audit by defining the objectives, scope,
and resources required.

• Execution - The execution phase involves conducting the audit in accordance with the plan, analyzing
records, and verifying compliance.

• Follow-Up – The follow up phase ensures the audit findings are addressed, and any necessary corrective
actions are implemented.

Each phase is essential to ensure the audit is conducted thoroughly, fairly, and efficiently.
Tax Audits - Planning Phase
Key Activities:
4. Developing the Audit Plan:
1. Understanding the Audit Objectives
• Outline tasks, timelines, and methodologies to
• Determine the purpose of the audit (e.g.,
be used during the audit.
compliance verification, fraud detection, revenue
• Assign responsibilities to team members and
enhancement).
allocate resources.
2. Identifying the Audit Scope
5. Communication with the Taxpayer:
• Specify the time period, type of taxes, and areas
• Notify the taxpayer about the audit and provide
of focus (e.g., income tax, VAT, payroll taxes).
details of the required documents and deadlines.
3. Gathering Background Information
6. Risk Assessment:
• Review the taxpayer's previous filings, financial
• Analyse the taxpayer’s profile to identify areas
statements, and compliance history.
with a high likelihood of non-compliance.
• Identify potential red flags, such as
inconsistencies or significant changes in
Deliverables:
reported figures.
• A comprehensive audit plan.
• A list of documents required from the taxpayer.
Tax Audits - Execution Phase
Key Activities:
4. Identifying Issues:
1. Document Review:
• Flag errors, omissions, or evidence of non-
• Examine financial statements, tax returns,
compliance.
invoices, receipts, payroll records, and other
• Quantify tax liabilities and penalties, if applicable.
relevant documents.
5. Using Analytical Tools:
2. Testing and Verification:
• Perform trend analysis, ratio analysis, and
• Verify the accuracy of reported income,
forensic reviews to detect anomalies.
deductions, and tax credits.
6. Compliance Checks:
• Cross-check information against third-party
• Ensure adherence to applicable tax laws,
reports (e.g., bank records).
regulations, and filing requirements.
3. Interviews and Queries:
• Engage with the taxpayer or their
Deliverables:
representatives to clarify discrepancies or gather
• A preliminary audit report summarizing findings.
additional information.
• Supporting evidence for identified discrepancies.
Tax Audits – Follow up Phase
Key Activities:
5. Lessons Learned:
1. Issuance of Audit Report:
• Document insights and challenges from the
• Provide a detailed audit report to the taxpayer,
audit to improve future audits.
highlighting findings, discrepancies, and
6. Monitoring and Compliance Improvement:
recommended actions.
• Track the taxpayer’s future compliance based on
2. Communication with the Taxpayer:
findings and recommendations.
• Discuss the audit findings and allow the taxpayer
to respond or provide clarifications.
Deliverables:
3. Taxpayer Adjustment:
• Final audit report and resolution documentation.
• Facilitate the payment of additional tax liabilities,
• Improved compliance from the taxpayer.
penalties, or refunds where applicable.
4. Enforcement Actions:
• If unresolved issues persist, initiate enforcement
measures such as penalties, interest, or legal
proceedings.
1.4
Tax Audits – Key Skills: Adequate Profiling Procedures
Profiling procedures for tax purposes involve the systematic gathering, analysis, and interpretation of data to
identify and assess tax risks, compliance levels, and potential areas for tax planning. The following are some
adequate profiling procedures commonly used:
Tax Audits – Key Skills: Adequate Profiling Procedures
Profiling procedures for tax purposes involve the systematic gathering, analysis, and interpretation of data to
identify and assess tax risks, compliance levels, and potential areas for tax planning. The following are some
adequate profiling procedures commonly used:
Tax Audits – Key Skills: Adequate Profiling Procedures
Tax Audits – Key Skills: Adequate Profiling Procedures
Tax Audits – Key Skills for Effective Tax Audits
Conducting effective tax audits requires a combination of technical expertise, analytical abilities, and
interpersonal skills. These skills enable tax auditors to assess compliance accurately, identify discrepancies, and
maintain fairness and professionalism throughout the audit process. Below are the essential skills:

1. Analytical Thinking 6. Problem-Solving Skills

2. Professional Scepticism 7. Ethical Integrity

3. Attention to Detail 8. Time Management

4. Strong Communication Skills 9. Technological Proficiency

5. Technical Knowledge 10. Interpersonal Skills

 Tax Audits – Key Skills for Effective Tax Audits
Skill
The ability to systematically evaluate complex financial data and extract meaningful
1. Analytical Thinking
insights.
• Identifying discrepancies in financial statements and tax returns.
• Conducting trend analysis to detect anomalies.

2. Professional Scepticism Maintaining a questioning mindset and critically evaluating evidence without bias.
• Scrutinizing unusual transactions or inconsistent records.
• Detecting potential fraud or intentional misstatements.

3. Attention to Detail The ability to thoroughly review documents and records to ensure accuracy.
• Verifying tax computations, deductions, and credits.
• Ensuring compliance with tax laws and regulations.

4. Strong Communication
The ability to convey information clearly and professionally.
Skills
• Explaining audit findings to taxpayers or their representatives.
• Preparing concise and well-structured audit reports.

5. Technical Knowledge A deep understanding of tax laws, regulations, and accounting principles.
• Ensuring the taxpayer's compliance with relevant tax laws (e.g., PITA, VAT Act).
• Interpreting complex tax regulations and applying them accurately.
 Tax Audits – • Key Skills for Effective Tax Audits
Skill
6. Problem-Solving Skills The ability to address and resolve issues identified during audits.
• Developing solutions for non-compliance or misreporting.
• Providing recommendations to improve taxpayer compliance.

7. Ethical Integrity Upholding honesty, impartiality, and confidentiality in the audit process.
• Ensuring audits are conducted without bias or external influence.
• Protecting sensitive taxpayer information.

8. Time Management The ability to prioritize tasks and meet deadlines effectively.
• Completing audits within the stipulated timeframe.
• Balancing multiple audits or projects simultaneously.

9. Technological Proficiency The ability to use digital tools and software for efficient audits.
• Using tax management systems to streamline processes.
• Leveraging data analytics tools for fraud detection.

10. Interpersonal Skills Building positive relationships with taxpayers and team members.
• Facilitating productive interactions during interviews and inquiries.
• Resolving conflicts diplomatically when disputes arise.
Tax Audits – Key Skills for Effective Tax Audits
Skill Importance in Tax Audits Practical Applications

• - Identifies patterns, trends, and • - Trend Analysis: Detecting

discrepancies in financial records and tax anomalies in reported income over
filings. time.
Analytical Thinking
• - Ratio Analysis: Evaluating profit
• - Facilitates logical and data-driven
margins or expense ratios for
decision-making.
irregularities.

• - Investigative Inquiries: Asking

• - Detects potential fraud or
probing questions about
misstatements in taxpayer submissions.
suspicious transactions.
Professional Scepticism
• - Verification: Cross-checking
• - Ensures objectivity and fairness in audit
taxpayer data with third-party
findings.
records.
2.1
 Tax Audit Techniques – AFS Analysis for Tax Audits

Overview
• Financial Statement Analysis is a critical process in
tax audits. It involves examining a company’s
financial statements to identify discrepancies,
verify compliance with tax laws, and assess the
accuracy of tax filings.

• The goal is to ensure that reported income,

deductions, and credits align with legal
requirements and reflect the taxpayer's true
financial position.
 Tax Audit Techniques – AFS Analysis for Tax Audits

Income Statement (Profit and Loss Statement) Cash Flow Statement

• Reflects the company’s revenues, expenses, and net • Details the cash inflows and outflows from operating,
income over a specific period. investing, and financing activities.
• Auditors use it to verify reported income, allowable • Helps detect discrepancies between cash transactions
deductions, and taxable profits and reported income.

Balance Sheet Statement of Changes in Equity

• Shows the company’s assets, liabilities, and equity at a • Reflects changes in shareholders’ equity, including
specific date. retained earnings and dividend payments.
• Used to identify undeclared assets or liabilities that may • Assists in identifying undisclosed distributions or equity
affect tax obligations. adjustments.
 Tax Audit Techniques – Key Areas of Focus
1. Revenue Recognition 4. Depreciation and Amortization
• Ensure all revenues are accurately reported and • Review the methods and rates used for calculating
taxable under the relevant laws. depreciation to ensure compliance.
• Look for unreported income streams, such as cash 5. Payroll Expenses
sales or deferred revenues. • • Cross-check payroll expenses with tax filings for PAYE
2. Expenses and Deductions compliance.
• Verify that expenses claimed as deductions are • • Ensure employee benefits, pensions, and other
legitimate and comply with tax laws. contributions are remitted correctly.
• Flag personal expenses disguised as business 6. Capital Transactions
expenses or overstated deductions. • • Review asset acquisitions, disposals, and revaluations
3. Taxable Income Computation for accurate capital gains or losses reporting.
• Assess adjustments made to accounting profits to • • Verify proper application of capital allowances
derive taxable income.
• Check for compliance with allowable and disallowable Other areas include Related Party (profit shifting)
expenses under tax laws. transactions, Dividend payments
 Tax Audit Techniques – Common Issues Identified
During AFS Analysis
1. Unreported Income - Revenue streams omitted from
tax filings.

2. Overstated Deductions- Inflated or non-deductible

expenses claimed to reduce taxable income.

3. Misclassified Transactions - Personal expenses

recorded as business expenses.

4. Non-Compliance with Tax Laws - Failure to remit WHT,

or underreported payroll taxes.

5. Inconsistent Records - Discrepancies between

accounting records and tax filings.
 Tax Audit Techniques
PROFORMA FOR INCOME TAX CALCULATION - DIRECT ASSESSMENT

Income for the Year

Earned Income XX
Investment Income XX
XXX

Add Benefit in Kind

Valuation of Residential Accommodation XX
Rent Paid XX
Salaries and Wages of Domestic Staff XX
Motor Vehicle XX
• Can you pinpoint areas of interest that may have
Assessable Income (A) XXX

Less Claim of Capital Allowance (Where an asset is

WHT impact?
procured for the purpose of mak ing the above income
i.e, Chargeable Asset) (XX)

Less Claim of Allowances (life • Can you pinpoint areas to review where income may
Assurance,Gratuities,NHS,Pension Contribution) (XX)
be understated?
Less Consolidated Relief (Higer of 1% of Gross Income
& NGN 200,000 Plus 20% of Gross Income) (XX)

Total Relief & Allowances (B) (XXX)

• What other taxes will you look out for?
Taxable Income(A-B) XXX

Tax @

First 300,000 7%
Next 300,000 11%
Next 500,000 15%
Next 500,000 19%
Next 1,600,000 21%
Above 3,200,000 24%
2.2
Identifying discrepancies and potential fraud
Activity Description
1. Analyse Financial Statements

• Look for inconsistencies between reported income and corresponding expenses. For
example, a business with low reported revenue but high operating expenses may be
Revenue vs. Expenses
underreporting income.

• Compare financial performance across multiple periods to detect unusual

Comparative Analysis fluctuations in income, expenses, or assets.

2. Cross-Verify Information

• Match taxpayer filings with external sources, such as bank records, supplier invoices,
Third-Party Data
and payroll reports.
• Check for discrepancies between different sections of the taxpayer's submissions,
Internal Consistency
such as revenue in the income statement versus VAT filings.

3. Look for Red Flags in Tax Returns

Unusual Deductions • Overstated or irrelevant deductions claimed to reduce taxable income.

• Significant changes in revenue, expenses, or payroll figures from year to year without
Sudden Changes
explanation.
Identifying discrepancies and potential fraud
Activity Description

4. Conduct Trend and Ratio Analysis

Abnormally low or declining profit margins compared to industry averages may
Profit Margins
indicate hidden income.
High ratios of expenses to income, particularly in areas like travel, entertainment, or
Expense Ratios
miscellaneous expenses, could be a red flag.

5. Scrutinize Cash Transactions

Unusual Cash Deposits or
Large or frequent cash transactions may indicate attempts to conceal income.
Withdrawals
Cash-Based Businesses High reliance on cash sales, common in certain industries, may lead to underreporting.

6. Monitor Payroll and Employee Records

Undeclared Employees Verify if all employees on the payroll have been declared for tax purposes.

Ghost Employees Detect fictitious employees used to claim false deductions.

PAYE Deductions Ensure Pay-As-You-Earn (PAYE) deductions align with employee earnings.
Identifying discrepancies and potential fraud
Activity Description

7. Use Data Analytics and Technology

Pattern Recognition Employ software tools to identify unusual patterns or anomalies in taxpayer filings.
Cross-reference information from tax databases, bank records, and government
Data Integration
registries.

8. Conduct In-Depth Interviews and Inquiries

Question Taxpayers Ask probing questions about specific transactions or inconsistencies.

Clarify Suspicious Claims Obtain detailed explanations for unusual deductions or discrepancies.

9. Examine Documentation for Falsification

Look for signs of tampering, such as missing pages, altered figures, or inconsistent
Altered Records
formats.

Fake Invoices or Receipts Verify the authenticity of invoices and receipts submitted as evidence.
Identifying discrepancies and potential fraud

Activity Description
10. Monitor Industry Norms
Compare taxpayer data to industry averages for revenue, profit margins, and expense
Benchmarking
ratios.
Flag taxpayers whose performance deviates significantly from industry norms without
Outliers
justification.

11. Assess Taxpayer History

Non-Compliance Patterns Identify taxpayers with a history of late filings, underreporting, or tax evasion.
Repeated Penalties Frequent penalties for the same issues may indicate deliberate fraud.
2.3
 • Key indicators of tax non-compliance

Some transactions or arrangements may indicate that indicate tax non-compliance. These indicators help auditors
detect inaccuracies, underreporting, or deliberate fraud. Below are the key signs.

• Mismatches between declared income and external records (e.g., bank statements, invoices).

• Sudden drops in reported income despite consistent or growing business operations.

• Personal expenses claimed as business expenses.

• Inflated or fabricated deductions such as travel, entertainment, or charitable donations.

• Large, frequent, or round-number transactions that lack supporting documentation.

• Transfers to offshore accounts without clear business justification.

• Failure to maintain or provide proper documentation for income, expenses, or deductions.

• Gaps in record-keeping, particularly for cash transactions or payroll.

• Undeclared employees or “ghost employees” on the payroll.

• PAYE deductions not aligning with employee earnings.

 • Key indicators of tax non-compliance (contd)

Some transactions or arrangements may indicate that indicate tax non-compliance. These indicators help auditors
detect inaccuracies, underreporting, or deliberate fraud. Below are key signs.

• Non-remittance of pension contributions, NHF, or other statutory deductions.

• Revenue, expenses, or profit margins that deviate significantly from industry benchmarks or prior periods.

• Mismatches between WHT remittance (by 3rd parties) and reported revenue.

• High reliance on cash transactions with limited paper trails.

• Unreported cash sales or underreported daily receipts.

• VAT collected from customers but not remitted to the tax authority.

• Withholding taxes deducted from vendors or contractors but not submitted.

• Transactions with related parties not conducted at arm’s length.

• Overpricing or underpricing of goods/services to manipulate taxable income.

• Excessive borrowing that doesn’t align with declared income or financial capacity.
 • Key indicators of tax non-compliance (contd)

Some transactions or arrangements may indicate that indicate tax non-compliance. These indicators help auditors
detect inaccuracies, underreporting, or deliberate fraud. Below are key signs.

• Disguising taxable income as loans or debt repayments.

• Lavish personal spending or acquisition of high-value assets that don’t match reported income.

• Ownership of undeclared properties, vehicles, or investments.

• Non-payment of taxes due, such as PAYE, CIT, or VAT.

• Failure to register employees with pension schemes or other statutory bodies.

• Late filing or failure to file tax returns.

• Frequent amendments to submitted returns without valid explanations.

• Unusually large tax refund requests without supporting evidence.

• Patterns of excessive refunds claimed year after year.

• Inconsistent reporting of income across different bank accounts.

 • Key indicators of tax non-compliance (contd)

Some transactions or arrangements may indicate that indicate tax non-compliance. These indicators help auditors
detect inaccuracies, underreporting, or deliberate fraud. Below are key signs.

• High activity in personal accounts used for business purposes.

• Overstatement or understatement of inventory levels, leading to manipulation of taxable income.

• Missing inventory records that don’t align with reported sales or purchases.

• Conducting business activities without proper registration or licensing, avoiding tax obligations.

• Resistance to audits, providing incomplete responses, or delaying information requests.

• Attempts to conceal or alter documents during the audit process.

• Frequent changes in accounting methods without valid reasons.

• Adjustments to prior-period financial statements aimed at reducing tax liabilities.

• Unjustified allocation of profits to low-tax jurisdictions.

• Lack of proper documentation for inter-company pricing agreements.

2.4
Collaboration with third parties

Gathering information from third parties such as banks, suppliers, and customers may play a
critical aspect in conducting a thorough tax audit, where it is needed.

These sources provide external verification of the taxpayer’s transactions, enabling tax auditors
to detect discrepancies, underreporting, or potential fraud.
 Curious case of the MFB
Bank GENZ is a micro finance bank that operates in Ilorin. As part of its
statutory obligations, the bank is required to deduct Pay-As-You-Earn (PAYE)
taxes from employee salaries and remit them to the KWIRS. The bank’ had
submitted its annual PAYE returns for 2023 which indicated that they had 12
employees who are resident in Kwara State.

During a wedding party, the groom who is prominent staff of Bank GENZ, took
his wedding photos. One of the photos was with his colleagues. The photo had
over 40 people.

Later, you stylishly asked a lady that was in the photoshoot for Bank GENZ
about her office and the turnout / support for the groom. She said some
people from the bank did not attend the wedding.

What are your thoughts? How can you verify any suspicion you may have?
2.5
 Structuring tax audit reports for clarity and impact

A well-structured tax audit report is critical for effectively communicating findings, ensuring compliance, and
supporting enforcement actions. It is essential to organize the report clearly and concisely while emphasizing key
issues. Below is a recommended structure for creating impactful tax audit reports:.

1. Statutory Details:
Details should include the appropriate taxpayer's name, taxpayer identification number (TIN), audit period, and
report date., the auditor's name, designation, and contact information.

2. Executive Summary
A snapshot of the audit’s scope, key findings, and additional liability, if any.
Highlight major issues (e.g., underreported income, non-remittance of VAT).
Summarize key corrective or remedial actions required of the taxpayer.

3. Methodology
Refer to the data sources / documents reviewed, such as financial statements, tax returns, and bank records.
Any assumptions: Highlight any assumptions made during the audit process.
Structuring tax audit reports for clarity and impact

4. Findings and Analysis

Present your findings in a logical and detailed manner.
Organize by Tax Type

5. Taxpayer’s Response
Present the taxpayer’s feedback on the audit findings.
Summarize responses to each finding. For instance, for under deducted WHT on vendor invoices, the Taxpayer
claims the disagreement with vendor on quantity invoiced.

6. Recommendations (Internal)
Provide actionable steps for compliance.
Specify tax liabilities, penalties, and deadlines for payment.
Example: “XYZ Enterprises is required to remit ₦2.75 million in outstanding WHT within 30 days on dividends paid
to shareholders (individuals).

7. Follow up and close out