Tax Audit Triggers and How Businesses Can Stay Prepared

In Nigeria, tax compliance is a statutory obligation for every business. The Federal Inland Revenue Service (FIRS) and relevant State Internal Revenue Services (SIRS) are empowered to examine the tax records of companies to verify compliance. A tax audit is not necessarily an indication of wrongdoing, however, it can be disruptive, costly, and reputationally damaging if a business is unprepared. Understanding the common triggers for tax audits under Nigerian law and knowing how to prepare can help businesses reduce risks and operate confidently.

Legal Basis for Tax Audits in Nigeria
The authority of the FIRS to conduct tax audits is rooted in law. Key provisions include:

1. Section 26 of the Federal Inland Revenue Service (Establishment) Act, 2007 gave FIRS power to access, demand, and review the books and records of taxpayers.
2. Section 58 of the Companies Income Tax Act (CITA), Cap C21, LFN 2004 (as amended) allows FIRS to call for returns, books, documents, and information to ascertain a company’s true tax position.
3. Section 60 of CITA permits the Service to raise additional assessments where it believes that income has been understated or tax underpaid.
4. Section 8 of the Value Added Tax (VAT) Act, Cap V1, LFN 2004 (as amended) mandates businesses to keep proper records and empowers the tax authority to audit VAT compliance.

These provisions collectively show that Nigerian tax authorities can independently verify compliance.

Common Tax Audit Triggers in Nigeria

While FIRS has the discretion to select businesses for audit, certain circumstances make a company more likely to be flagged:

1. Discrepancies in Tax Returns

Where figures in a company’s self-assessment return under Section 52 of CITA do not align with third-party information (e.g., banks, regulatory filings, or contracts disclosed to government agencies), FIRS may initiate an audit.

2. Failure to Remit Withholding Tax (WHT) and VAT

Sections 78–80 of CITA impose an obligation on companies to deduct and remit WHT on qualifying payments. Similarly, under Section 15 of the VAT Act, VAT collected on goods and services must be remitted to FIRS. Failure or delay in remittance is one of the most common audit triggers.

3. Unusual or Excessive Deductions

Deductions must comply with Section 24 of CITA, which outlines allowable expenses. Claims outside these parameters (e.g., excessive director expenses, unverifiable entertainment allowances, or personal expenses booked as business costs) can lead to an audit.

4. Consistent Operating Losses

Where a company declares losses over several years without a credible turnaround strategy, FIRS may suspect profit-shifting or income suppression and trigger an audit.

5. Cash-Intensive Businesses

Sectors such as retail, hospitality, and transportation, where cash transactions dominate, often face higher audit risks due to underreporting concerns.

6. Employment Tax Issues

Failure to deduct and remit Pay-As-You-Earn (PAYE) under the Personal Income Tax Act (PITA) or misclassifying employees as “independent contractors” to avoid payroll tax obligations can also lead to scrutiny.

7. Unreported Foreign Transactions

Where companies fail to disclose offshore income, related-party transactions, or transfer pricing arrangements under the Income Tax (Transfer Pricing) Regulations, 2018, they may attract a tax audit.

How Businesses Can Stay Prepared
Businesses can protect themselves through proactive compliance and strong internal processes which includes:

1. Maintain Accurate and Complete Records

As mandated by Section 63 of CITA, companies must keep proper books of account sufficient to determine taxable profits. Accounting software and digital recordkeeping make compliance easier and help during audits.

2. Conduct Internal Tax Audit

Periodic self-reviews ensure discrepancies are identified before FIRS does. This includes reconciling VAT, WHT, and PAYE remittances with actual returns and cross-checking compliance with relevant laws.

3. Ensure Transparency in Deductions

Every deduction must fall under allowable business expenses as provided in Section 24 of CITA which deals with deductions allowed, and be backed by valid documentation (receipts, invoices, contracts). Inflated or undocumented claims are high-risk.

4. File and Pay Taxes Promptly

Compliance with filing deadlines under Section 55 of CITA (Companies Income Tax), Section 15 of VAT Act (VAT remittance), and other relevant Tax law helps avoid penalties and audit exposure.

5. Engage Professional Tax Advisors

Professional guidance is crucial, especially for complex issues such as transfer pricing, mergers, acquisitions, and international tax obligations.

6. Develop an Audit Response Strategy

Businesses should designate a compliance officer or team responsible for audit matters, ensure prompt but careful responses to FIRS queries, and maintain open communication while safeguarding the company’s legal interests.

Conclusion

In Nigeria, tax audits are a statutory tool for ensuring compliance and protecting government revenue. Businesses that understand the common triggers and prepare accordingly will reduce audit risks and avoid penalties, interest, and reputational harm. Ultimately, compliance is an obligation and a pathway to sustainable growth and credibility in the Nigerian market.