Tax authorities do not conduct tax audits arbitrarily. There are tax-audit triggers. The question is always what triggers tax audits? The word “trigger” has an equivalent meaning to such words as “prompt,” “initiate,” “set off,” and “cause,” among others.
Therefore, triggers of tax audits are the factors that cause audits or necessitate tax authorities to conduct them. The core mandate of tax authorities is to implement tax laws and collect tax revenues on behalf of the government. Tax revenue is collected from taxpayers.
Hence, tax authorities must ensure that taxpayers comply with tax laws and remit the correct amounts of tax due on time. Many things trigger tax audits. Many things happen through information. Hence, we can group triggers of tax audits into two broad categories.
a. General tax audit triggers.
b. 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 every 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 the 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 a tax audit can vary from a compliance audit to a routine audit, an in-depth audit, and an investigation audit, among others.
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 available after tax audits of taxpayers and reveals details that impact the 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 these 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 typically due on a specific date. Failure to submit the tax returns by that date attracts a fine. In cases where taxpayers constantly submit tax returns late, the tax authority may conduct a tax audit.
c) Failure to remit taxes
Taxpayers are expected to remit their due taxes. Failure to remit taxes will attract penalties and interest 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 their taxes by a certain date. When a taxpayer consistently remits tax late, the tax authority will conduct an audit of the taxpayer’s tax affairs to establish the reason 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 the purpose of cross-checking the tax information to ensure that there is no tax loss.
f) Use of PIN
Currently, a 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 a PIN. Information gathered about the use of PINs 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 the right to apply for de-registration for taxes such as VAT and Excise duty, etc., where the tax obligation is removed or they no longer meet the registration threshold.
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, changes in tax legislation occur, affecting taxes such as VAT, which are based on turnover. For example, if the government increases the turnover threshold for any tax, any taxpayer with a turnover below the new 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.
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