In taxation, tax investigation and audit are two important concepts. Tax investigation is the process by which tax authorities of a country reviews a company or individual’s tax affairs. It is carried out by a country’s tax authority. In Nigeria, it is the Federal Inland Revenue Service (FIRS) that carries out tax investigations.
Tax investigation is carried out after a period of 6 years. The idea is to verify a taxpayer’s financial records and the filing of tax. It usually goes beyond the audit. It is normally carried out when there is a suspicion of tax irregularity, inconsistency in filing, tax evasion and non-compliance. This is also carried out to ascertain that income, expenses, and profit are reported accurately. It aims at ensuring that taxes like Value Added Tax (VAT), Company Income Tax (CIT) and Pay As You Earn (PAYE) are paid fully and correctly. Also, inconsistencies in VAT and payroll submission, late filing or non-filing of return, inconsistency in income declared or inordinate expenses are ascertained.
Tax investigation could be limited in scope, comprehensive, or criminal. Limited investigation arises when attention is on specific area of interest like VAT or payroll reporting. Comprehensive investigation takes a wholistic of the financial records like income and expenses. This is often as a result of suspicion or fraudulent reporting. Criminal investigation arises when there is tax evasion which can lead to prosecution and imprisonment.
In most cases, attention will also focus on documents like; Tax return (CIT, VAT, PAYE), Invoices and Receipts and Audited financial statement.
The taxpayer could also have right during this investigation which could be;
- Clarification on the reason and scope request
- Be notified in writing of the investigation
- Allowed to be represented by a tax authority
- Request for a reasonable timeframe in order to provide the needed documents.
Tax investigation is not automatic. It could be avoided by filing the required amount of tax. Respond properly and timely to all tax authority correspondence and make sure your financial books are kept properly.
Status bar is a 6-year period in tax audit implying that tax audit can not be carried out after this 6 years. After the 6 years, tax authorities can now resort to tax investigation in order to examine the books and documents.
Difference Between Tax Investigation and Audit
The difference between tax audit and investigation is that tax audit can be carried out at anytime within the statutory bar of 6 years. Tax audit is a routine examination of the taxpayer’s records to verify that tax returns are accurate and comply with the law. The purpose of tax audit is to ensure compliance and correctness in the amount on income declared for payment.
Tax investigation on the other hand is a detailed examination of taxpayer’s records especially when fraud, criminal and tax evasion activities is involved. Tax investigation is broad and may cover virtually all aspects of financial of the taxpayer. This is carried out by a special unit like tax intelligent and investigation department.
Also Read: Tax Audit and Compliance; A Guide for Businesses and Tax Payers
