As part of the process employed by tax officials to ensure that taxpayers’ returns are in compliance with the relevant laws, tax audit stands out as a very effective tool.
Tax audit involves the examination of the books of a taxpayer (individual and corporate) by the relevant tax authority as a means of monitoring the level of compliance by these entities. It comes in three major forms: correspondence audit, desk audit, and field audit. Of the three forms, field audit has the widest perspective because a more general approach is adopted by the tax officials in conducting it. The tax officials, in conducting a field audit look out to verify that expenses incurred are of a reasonable, exclusive, whole and necessary nature, while also ensuring that all income of the entity is properly captured. That is, they examine the records of the taxpayer so as to ensure that the accounting and tax recording of transactions are in line with relevant standards and laws.
As straightforward as this process sounds, it brings huge anxiety to taxpayers subjected to it. It is of common knowledge that whenever a taxpayer is served with a notice of a tax audit, such taxpayer starts to panic and gets all worked up. This is not just the case of small entities with a bad bookkeeping system, but also that of multinationals with a well-organized system. This is because tax issues are peculiar to corporate levels.
To effectively manage a tax audit for which your entity is scheduled for, the following points, as brief as they are will go a long way in providing the necessary guidance:
Personal InvestmentFirstly, a point of contact must be established. When dealing with tax officials, it is pertinent for a professional, i.e. one experienced and knowledgeable in tax matters to handle all discussions on behalf of the company. This is necessary so as to ensure effective and timely communications, while at the same time guarding against the misrepresentations of sensitive information to tax officials. Where the entity does not have suitably qualified staff for this purpose, it should go ahead and hire a tax consultant. The aim of the tax consultant is to act as a professional mediator between the entity and the tax authority. Though the consultant is employed by the entity, he is expected to be professional in his dealings by not employing crooked means, aimed at reducing the tax liabilities of his principal.
Scrutinize the tax audit notification letter:After establishing a point of contact, the next immediate thing to do is for the contact point to scrutinize the letter received. Based on his scrutiny, he should come up with expectations of the audit which will guide the entity in preparing for the exercise. His scrutiny could also determine if the entity will need an extension of time than what the letter stated to effectively prepare for the audit. Where more time will be required, an extension of time could be requested for from the tax authority with valid reasons stated. Such requests are usually obliged in many instances especially where the tax authority is satisfied that the reasons adduced are genuine.
Review the entity’s records:It’s now time to get down to the real business of preparing for the audit. At this point, the dedicated professional is required to review the records of the entity in line with the perceived expectations of the tax authority. Specifically, the professional should review the accounting methods adopted, tax returns filed and carry out risk assessments to help identify potential issues. Such review is expected to throw up issues which might be brought up by the tax man upon the audit proper. Having an idea of the expected issues to be brought up during the audit is a “nerve calmer” for the subject entity.
Prepare the location for the audit:Most audits take place behind closed doors, hence, it is important that a secluded location, probably the conference room, be prepared before the commencement of the audit. Also, documents requested for the audit by the taxman should also be placed in the room before the commencement.
Best attitude during the audit:At this point, the tax man is in your premise for the audit. It is therefore pertinent for you to know the way he operates, even though you are not the point of contact. A tax auditor has his eyes out for the tiniest detail, hence, he may be very annoying with his questions and request for additional documents. Most times, they ask questions for which they have answers to just to see how much they can trust you. Hence, you must at all times be calm, polite and friendly. Do not give misleading information and back up your statements with documents at all times where possible (or available).
The above points look at just the responsibilities of taxpayers in ensuring a smooth tax audit. However, the onus of ensuring a smooth tax audit exercise does not rest with just the taxpayer, but also with the tax authority. Tax officials must be continuously well-oriented when going out for tax audit exercises. This is necessary as it guides them in building a mutually beneficial relationship with the taxpayer. The tax authorities must adequately and continuously train tax officials as it guarantees that they will perform their responsibilities efficiently and effectively. Also, taxpayers must be continuously educated on their obligations as stated in the respective tax laws and also on the relevance of a tax audit every now and then to ensure that accurate taxes are paid as and when due.
Author: Wole Oluyemi is a chartered accountant and business advisor, with special interests in SME businesses, strategy, finance and tax. He is also a doctoral researcher at Cranfield University (UK) with research focus on corporate political strategy. He can be reached at @WoleOluyemiCo on Instagram, Twitter and Facebook.