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Introduction

A tax audit is the examination of books and records of accounts for taxation purposes.

Types of tax audits in Kenya

In Kenya like in many other countries, there are many types of tax audits depending on the taxpayer and the information that KRA has. For example, KRA occasionally undertakes:

1. Compliance tax audits – normally a desk or field tax audit.
2. In-depth tax audit – usually field tax audits.

Triggers of tax audits

Triggers of tax audits are the factors that inform KRA of the need for a tax audit. There are two categories of triggers of tax audits:

1. General triggers – triggers for all tax types.
2. Specific triggers – triggers for specific tax types.

General triggers of tax audits

These are factors that are not specific to any tax type or tax period. The factors can be in any tax type and can be for any tax period. The factors are according to the source of the information that KRA will rely on to make a tax audit decision.

There are two sources of information that KRA relies on to make decisions about tax audits:

1. Internal sources.
2. External sources.

Internal sources

KRA uses the information provided by the taxpayer irrespective of whether the taxpayer provided the information directly or the information was provided on behalf of the taxpayer by a third party such as a tax agent. The following are some of the factors from internal sources that may trigger a tax audit:

1. Non-compliance detected during compliance audits.
2. Information from related company audits.
3. Use of PIN.
4. Industry trends.
5. Application for de-registration.
6. Changes in the country’s legislation.
7. Tax returns submitted.
8. Tax payment trends.
9. Tax refunds claimed

External sources

These are sources that provide information to KRA but they do not provide the information on behalf of the taxpayer. The following are some of the external sources of information:

1. Unhappy employees in companies who act as “moles” for information.
2. Third-party information providers.
3. Closure of whole business or a large part of business.
4. Websites.
5. Media publicity.
6. KRA intelligence units.
7. Unhappy spouses.
8. Unhappy marital extras.

Specific triggers of tax audits

Specific triggers are tax audit factors that are specific to a tax type. The following are some specific trigger factors for various tax types:

PAYE audits

1. Variance in annual account salary figures and PAYE returns.
2. Complete failure to remit PAYE.
3. Failure to remit PAYE payment on time.
4. Significant fluctuations in PAYE on a month by month basis.
5. Higher director’s standards of living compared to declared salaries.
6. Higher salaries to senior employees compared to company directors.
7. Variance between PAYE remitted and staff costs in annual audited accounts.

Corporate tax audits

1. Failure to separate sources of taxable income where a company has more than one source of taxable income.
2. Variance between annual VAT return’s turnover and annual audited accounts turnover.
3. Reporting income tax losses into perpetuity.
4. Deducting expenses that do not match the specific business expenses.
5. Reputation of the company’s tax services providers e.g. tax auditors, tax advisors etc.
6. Gross profit margin variance compared to the industrial average.
7. Unexpected losses in audited accounts.
8. Information from other tax audits.

VAT audits

1. Turnover per annual VAT returns differs from turnover per annual audited accounts.
2. VAT refund claims.
3. Failure to remit VAT.
4. Consistently filing VAT returns late.
5. Failure to account for Withholding VAT when a company is in a VAT refund position.
6. Input VAT claims by customers or clients.
7. Failure to maintain a VAT control account.
8. Filing of nil VAT returns.
9. Consistent VAT credit position.
10. Non-compliance actions such as failure to use ETR.
11. Industry-wide tax audits.

Domestic Excise Duty Audits

1. Failure to determine correct ex-factory price.
2. Failure to remit excise duty.
3. Failure to collect excise duty.
4. Claiming of remission or refund without complying with the Excise duty provisions set out in the Act.
5. Excise tax refund claims.
6. Industry-wide tax audits.

These are not the only tax audit triggers. There are many other tax audit triggers in Kenya.

Questions:

1. What factors would trigger a tax audit in your business?
2. What action do you need to take to address the situation?

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.

Disclaimer

This post is for general overview and guidance and does not in any way amount to professional advice. Hence, www.taxkenya.com, its owner or associates do not take any responsibility for results of any action taken on the basis of the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA. Tax industry in Kenya is very dynamic.