- 15 Marks
Question
Zola Nigeria Limited has been in business for several years, preparing its accounts to December 31 of every year. Prior to the last two years, the company had a very good relationship with the Federal Inland Revenue Service (FIRS) as far as prompt filing of annual tax returns and payment of tax liabilities are concerned. The company was, however, fined for late filing of returns in the last financial year ended December 31, 2020.
In compliance with the provisions of the Companies Income Tax Act Cap C21 LFN 2004 (as amended), the company filed its annual returns for the 2022 assessment year (year ended December 31, 2021) within the statutory period. Payment of tax due was also made.
The review done by the tax officials at the FIRS on the tax returns filed by the company necessitated the request for additional relevant documents to authenticate some items of expenditure and capital allowances claimed. The FIRS subsequently wrote a letter to the company for the submission of the documents within two weeks of the receipt of the letter. The receipt of the letter was acknowledged by the company, but it, however, failed to forward the required documents to the tax authorities. A reminder was sent to the company four weeks after the first letter was written, yet it failed to respond to the request made.
The Managing Director of the company has just received a letter from the tax office that a team of tax inspectors will be visiting the company in a fortnight to conduct a tax audit.
The company has approached your firm of chartered accountants to assist with advice on how the company should handle the forthcoming tax audit.
Required:
Your Principal Partner has directed you, as a newly employed Audit Senior, to handle the engagement and expects you to prepare a report for his review before sending the same to the client. The report should address the following:
a. Objectives of tax audits (5 Marks)
b. Stages in a typical tax audit process (4 Marks)
c. Schedule of requirements for FIRS tax audit (6 Marks)
Answer
a. Objectives of Tax Audits:
- To ensure compliance with tax laws by verifying the accuracy of tax returns.
- To detect and deter fraudulent or negligent tax practices.
- To provide a basis for tax adjustments and enforce tax regulations.
- To ensure fair and accurate assessment and payment of taxes due.
- To maintain and improve taxpayer trust in the tax system.
b. Stages in a Typical Tax Audit Process:
- Preparation and Notification: The tax authority notifies the taxpayer of the upcoming audit and outlines the documentation required.
- Preliminary Review: Initial review of submitted returns and supporting documents to identify areas needing further scrutiny.
- Fieldwork and Examination: On-site review of records, books, and related financial information to assess compliance.
- Discussion and Reporting: Findings are discussed with the taxpayer, and a report is issued detailing any discrepancies or adjustments.
c. Schedule of Requirements for FIRS Tax Audit:
- Detailed income statements and balance sheets for the relevant tax years.
- Proof of expenses and deductions claimed, including receipts and invoices.
- Records of capital allowances claimed, with supporting calculations.
- Documentation for any tax exemptions or reliefs applied.
- Employee payroll records, especially for PAYE tax compliance.
- Documentation of all inter-company and related-party transactions.
- Topic: Tax Administration and Dispute Resolution
- Series: NOV 2023
- Uploader: Dotse