INTRODUCTION
Tax authorities do not conduct tax audits for the sake of it. There are tax audit triggers. The questions are always what triggers tax audits? The word trigger has equivalent meaning to such words as prompt, initiate, set off, cause etc. Therefore, triggers of tax audits are what causes the audits or what necessitates tax authorities to conduct tax audits.
The core mandate of tax authorities is to implement tax laws and collect tax revenues for the government. Tax revenues are collected from taxpayers.
Hence, tax authorities must ensure that taxpayers are complying with tax laws and are remitting the correct amounts of tax due on time.
Many things trigger tax audits. The many things happen through availed information. Hence, we can group triggers of tax audits into two broad categories.
- General tax audit triggers.
- Specific tax audit triggers.
GENERAL TAX AUDIT TRIGGERS
What are the general tax audit triggers? These are factors that are experienced by every taxpayer and for any type of tax. The factors are in the form of availed information that the tax authority will rely on to conduct tax audits.
The internal general tax audit triggers will trigger audits in Value Added Tax (VAT), Domestic excise duty, Pay As You Earn (PAYE), corporate tax, Customs and Excise duty etc.
Many general factors may trigger tax audits. The factors can be grouped into two broad categories.
- Internal factors.
- External factors.
This post will address the internal factors that are general tax audit triggers. The next post will address the external factors that are general tax audit triggers.
INTERNAL FACTORS
Internal factors are factors that emanate from the tax authority itself. It is information that has been provided by the taxpayer to the tax authority. The factors that will trigger the tax audits will emanate from this information that is already held by the tax authority.
The information does not cost the tax authority any money. Besides, in most cases, the information is old information but in other cases, the information may be current.
The information can result in a tax audit conducted in the office (desk audit), in the field (field audit) or a combination of the two (desk and field audit). The depth of the tax audit can vary from compliance audit, normal audit, in-depth audit and investigation audit etc.
PROVIDERS OF TAXPAYER’S INTERNAL INFORMATION
Tax non-compliance will be detected during the examination of the information provided to the tax authority. The information the tax authorities rely on is from four main sources:
a) The company itself
This is the information that is provided when registering for tax and when submitting tax returns (monthly, quarterly or annually. The information is also provided when making changes to tax records and when remitting taxes to the tax authority.
b) Related companies
The information is provided during tax registration and when submitting periodic tax returns. The information is also provided when making changes to registration details and company directors.
c) Trading partners
The information is provided when submitting monthly tax returns and when the taxpayers are under tax audits.
d) After-tax audits
The information is availed after-tax officers’ conduct tax audits on taxpayers and unearth information that impacts on tax compliance of other taxpayers. This information may trigger cross tax audits.
GENERAL INTERNAL FACTORS THAT TRIGGER TAX AUDITS
Various general internal factors may trigger a tax audit. In this post, we will look at some of those factors.
a) Failure to submit tax returns
For every tax type, there are provisions on when to submit tax returns. For example in Kenya, VAT3 monthly returns are submitted for a tax period (normally one calendar month).
The tax returns must be submitted by the 20th day of the month after the closure of the tax period. Failure to submit the tax returns attracts a fine. The tax authority may want to know why the taxpayer is not submitting tax returns.
b) Persistent late submission of tax returns
Tax returns are supposed to be submitted by a certain date. Failure to submit the tax returns by that date attracts fines. In cases where taxpayers constantly submits tax returns late, the tax authority may conduct a tax audit.
c) Failure to remit taxes
Taxpayers are expected to remit due taxes. Failure to remit taxes will attract penalties and interests in addition to the principal tax. In cases where taxpayers are not remitting tax, the tax authority will establish the reasons.
d) Consistent late tax remittance
Taxpayers are expected to remit due taxes by a certain date. When a taxpayer consistently remits tax late, the tax authority will conduct an audit on the tax affairs of the taxpayer to establish the reasons for the late submission of the taxes.
e) Cross audits
When taxpayers are audited, the tax officers may pick information on related companies or trading partners and conduct cross audits. This is for purposes of cross-checking the tax information to ensure that there is no tax loss.
f) Use of PIN
Currently, personal identification number PIN (in Kenya) or any other tax identification number is one of the documents that is constantly being relied on for taxation purposes.
Many government transactions require the use of the PIN. Information gathered on the use of PIN by the tax authority may trigger tax audits.
g) Industry trends
Industry trends may trigger tax audits. For example, in cases where there is information about increased and profitable growth in certain industries, KRA may audit any taxpayer in that industry, the internet industry.
h) Application for de-registration
Taxpayers have a right to apply for de-registration for such taxes as VAT and Excise duty etc. where the tax obligation is removed or they no longer meet the threshold for registration.
It is normal for a final tax audit to be conducted before tax de-registration to close the tax file.
i) Changes in tax legislation
Occasionally, there are changes in tax legislation where some taxes such as VAT that are turnover based are affected. For example, in case the government increases the turnover threshold for any tax, any taxpayer below the turnover threshold will be de-registered. This will require a final tax audit.
CONCLUSION
Many internal general factors may trigger a tax audit. Hence, tax authorities do not rely on the factors in this post. The tax industry is very dynamic and many general internal factors continue to be identified.
The next post will address some of the general internal factors that trigger tax audits.
OUR CALL! Remember to:
a. SUBSCRIBE to this Website and YouTube Channel – TaxKenya Shows.
b. LIKE videos on our YouTube Channel- TaxKenya Shows.
c. Leave a COMMENT on this Website and YouTube Channel- TaxKenya Shows.
Feel free to send us tax and investments in Kenya questions or topics via email taxkenya@gmail.com that you would wish to be covered in this Website.
Remember to:
