FIRS Guidlines on Tax Inquiry Processes

The Federal Inland Revenue Service (“The Service’’) recently issued a guideline to the public on tax inquiry processes. The guideline is to replace earlier publications issued in October 2020 and April 2021, and to keep relevant stakeholders updated of the tax inquiry processes adopted by the Service from time to time. Through the guideline, the Service has further clarified on the three (3) levels of tax compliance inquiry functions which are Desk Examination, Tax Audit and Tax Investigation.

It is important to note that the tax inquiry processes are in line with the mandate of the Service as provided in the Federal Inland Revenue Service Establishment Act, 2007. The guideline is important in order to define the scope and roles of each inquiry activity, so as to prevent conflict of roles.

Nature of Scope of Inquiry Functions within the Service

A detailed explanation of the nature and scope of each of the tax inquiry functions of the Service is provided below:

Desk Examination and Monitoring Exercise

Desk Examination is generally called ‘’Desk Review’’ or ‘’Desk Query’’. It is within the jurisdiction of the relevant tax offices and usually carried out by the officers in the Returns Payment and Processing (RPP) unit. Desk Examination is based on the current self-assessed tax returns submitted by taxpayers.

Monitoring Exercise on the other hand is carried out by Government Business Tax Offices (GBTO) and VAT & WHT desk officers in tax offices. Monitoring exercise is restricted to current year activities only. The essence of desk examination and monitoring exercise is to ensure completeness, arithmetical accuracy, and detection of obvious misapplication of tax laws.

Major highlights of desk examination exercise

• It is limited to issues relating to reconciliation of `balances (brought forward and carried forward).

• It focuses on checking the accuracy of tax computations, losses, capital allowances and minimum tax computation.

• It imposes penalties for late filing of returns (i.e., LRP).

• It is required to convert dormant into live cases.

• It does not involve visitation to taxpayer’s offices and request for source document relating to revenue and expenditure items.

• It can cover beyond current tax returns where taxpayers file more than one year tax returns.

Tax Audit Exercise

Tax audit is carried out by designated officers of the Service in the various tax audit offices across the federation. It is important to note that tax audit offices are categorized on turnover threshold (i.e., Micro & Small, Medium, and Large) and other specific basis (Government Business, NGOs, Pioneers, etc.). Tax audit exercise may be routine (based on risk profiling) or special (based on taxpayers’ request for refund or business combination). Tax audits are back-duty verification exercises, hence may not include current year.

Major highlights of tax audit exercise

• It must be guided by detailed audit plan and methodologies.

• It must not exceed six (6) preceding years.

• It must be preceded by a pre-audit meeting with a taxpayer.

• It is a field exercise conducted at taxpayer’s office.

• It is undertaken to rectify any discrepancies in the tax returns by raising additional tax assessment.     

Tax audit exercises are usually carried out at the taxpayer’s office to enable the FIRS team to access, vet and verify relevant documents, records and information provided by the taxpayer.

Tax Investigation & Special Tax Crimes Investigation

• Tax Investigation

This is a careful, detailed, and painstaking examination of infractions of the tax laws. Just like tax audit, it is carried out by designated officers who have been trained by the Service on tax investigation. Tax investigation is not a routine exercise but is usually based on triggers arising from referred cases from the tax offices or other departments, fraudulent activities/cases, non-compliance with existing tax laws and provisions, continuous declaration of losses, resistance to tax audit exercise, persistence low tax to turnover ratio for more than 3 years, abusive tax planning scheme, money laundering, etc.   

Major highlights of tax investigation exercise

• It is based on triggers and must be approved by the Management.

• It is not restricted to any number of years.

• It can lead to criminal prosecution.

• It does not cover the current year.

• It is not precluded by an ongoing or already conducted desk review examination or tax audit exercise.

• Special Tax Crimes Investigation

This is another unit within the Service, distinct from tax investigation, that is designated to examine cases of serious tax related criminal activities such as tax evasion, fraud, money laundering, illicit financial flow (IFF), etc. Officers of this unit are specially trained on financial crime and tax matters, and they adopt various methodologies, including forensic accounting and surveillance, to gather evidence for prosecution.

Cases managed by this unit are usually referred to it based on triggers from relevant quarters. Some of these triggers include:

• Tips from anonymous persons/group/body or whistleblowers.

• Petitions written to the Service.

• Unreported offshore transactions.

• Aggressive tax planning arrangement.

• Illicit financial flows.

• Verified financial fraud cases reported in the national dailies, social media, other electronic media.

• Cases handled by other law enforcement agencies.

• Frequent changes in business structure.

Special tax crimes investigation is similar to tax investigation in terms of work approach and methodologies, but it overrides other forms of compliance inquiry.

It is important to note that identified infractions of the tax laws and discrepancies in tax information may lead to additional assessment, including imposition of interest and penalty.

Other Tax Inquiry Processes

Transfer Pricing Audit

Transfer pricing is a special aspect of tax involving transactions with related parties. Considering its specialty, a separate office, International Tax Department (ITD), was designated to address transfer pricing related issues. Transfer pricing audit is carried out by the personnel of ITD. It is however important to note, that transfer pricing audit is not within the scope of Desk Examination, Monitoring Exercise, Tax Audit and Special Tax Crimes Investigation, hence can only be carried out by the ITD.

Turnover Threshold Determination

Based on the segmentation policy of the Service, tax offices (Small & Micro, Medium and Large) are categorized on turnover threshold or other special basis (Government Business, NGOs, Pioneers, etc.). It is important to note that taxpayers who are on a range of turnover threshold for three (3) consecutive years shall be transferred accordingly.

The above is equally applicable in determining the audit/investigation office that is enabled to carry out tax audit/investigation on a particular taxpayer.

Areas of Concerns

We have carefully analyzed the explanation of the nature and scope of each of the tax inquiry functions, we believe that the Service needs to clarify some of the concerns raised by taxpayers.

• National monitoring VAT & WHT exercise is usually carried out at intervals by the Service. We are aware some were carried out in 2015/2016, 2019, 2022 and an upcoming one in October 2023. We are wondering which aspect of the inquiry functions/processes this can be classified.

• Considering the document retention policy/statue barred period of six (6) years, how possible is it for a taxpayer to access documents for the purpose of a tax investigation exercise covering more than six (6) years?

• For tax investigation, how will a taxpayer ascertain or establish that the exercise has been duly approved by the Management?

• Taxpayers are interested in understanding the nature of triggers that necessitated their files from being referred to tax investigation. Can tax investigation triggers be communicated to taxpayers going forward, at least to enable them to make amends and regularize their tax records accordingly?

Concluding Remark

It is obvious that the complaints from various quarters on conflicting tax inquiry cases have gotten to the Management of the Service, hence the reason for the updated guideline.

The guideline is a welcome development as it will enhance tax administrative efficiency and enable taxpayers to have better understanding of tax compliance inquiry processes. In addition, the challenges that normally arise when an ongoing tax inquiry handled by an office for a particular period is to be undertaken by another team/office, has been finally laid to rest.

The issue of other units/offices of the Service meddling in transfer pricing cases has also been properly addressed as the International Tax Department (ITD) has been clarified to be the only office or unit designated to handle such.   

With the reasonable information provided by the Service on the various triggers that can necessitate tax investigation/special tax crimes investigation, taxpayers will be more informed and conscious of tax compliance, particularly from their business dealings to prevent unnecessary tax exposures that may arise from additional assessment and imposition of interest and penalty.

While improved and voluntary compliance is better achieved through periodic sensitization and enlightenment of taxpayers, the role of technology in driving tax compliance cannot be underestimated. However, the success so far recorded from the implementation of tax automation (i.e., the adoption of TaxPro Max) is commendable and we are hopeful that over time, if the Service remains committed to its automation initiatives, the complete tax inquiry cycle will be fully enrolled and become more seamless.