ABSTRACT
The study examines the effect of tax audit and investigations strategies on tax revenue collection methods in Nigeria, which is the main objective of the study. The specific objectives are: the effect of tax audit and investigation (TAI) components and tax deducted at source/advance tax payment; effect of TAI components on direct tax payments and TAI components on self assessment tax policy. Descriptive survey research design was adopted in obtaining data based on the opinion of respondents from the Federal Inland Revenue service (FIRS) in Nigeria. The population of the study is 350 staff of FIRS selected from five states in south eastern Nigeria (70 per state), who were administered with a questionnaire. The study made use of convenience sampling technique out of which 250 questionnaire filled by the staff was adopted as the study sample size. The study employed descriptive statistics such as percentages and frequencies and the use of linear regression method. The study findings reveal that tax audit and investigations elements have a significant effect on tax deductible at source/ advance tax payment except access to information from other countries revenue authorities which has no significant effect on tax deductible at source/ advance tax payment. Further findings revealed that taxpayers record keeping obligation, access to taxpayers books and records, and access to information from other countries revenue authorities has significant effect on direct tax payment in Nigeria, while access to third party information source, powers to amend returns from tax payers claim and sanctions for non compliance has no significant effect on direct tax payment in Nigeria. Finally it was discovered that taxpayers record keeping obligation, access to taxpayers books and records, access to third party information source, and access to information from other countries revenue authorities has no significant effect on tax as a result of self assessment in Nigeria while, powers to amend returns from tax payers claim and sanctions for non compliance has a significant effect on tax as a result of self assessment. Base on the findings of the research, it is recommended that Tax administrative authorities should harmonize data with other government agencies like the National Identity Management Commission and Nigerian Communication Commission to enhance capturing of more citizens into the tax net. If that is done, it can improve tax records as well as sort out issues of investigating the activities of tax payers in view of tax audits. This will go a long way in improving tax deductions at source/advance tax payment as transactions of tax payers captured digitally can be monitored, audited and investigated for tax purposes.
TABLE OF CONTENTS
Cover page i
Title Page ii
Declaration iii
Dedication iv
Certification v
Acknowledgement vi
Table of contents vii
List of tables
Abstract vii
Chapter
1: INTRODUCTION1
1.1 Background to the Study 1
1.2 Statement of the Problem 4
1.3 Objective of the Study 6
1.4 Research Question 7
1.5 Hypothesis 7
1.6 Significance of the Study 8
1.7 Scope of the Study 9
1.8 Definition of Operational Terms 9
1.9 Limitation of Study 11
Chapter
2: REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework 12
2.1.1 Concept of tax audit and investigation 12
2.1.2 Factors affecting tax compliance 21
2.1.3 Tax policy reforms and tax administration 25
2.1.4 Previous tax reforms 27
2.1.5 Overview of tax administration reform
actions in Nigeria 31
2.1.6 Organisational restructuring 32
2.1.7 The Nigeria National tax policy 34
2.1.8 Tax legislation: FIRS autonomy 35
2.1.9 Tax appeal tribunal 35
2.1.10 Compliance and Enforcement 38
2.1.11 Taxpayers services 38
2.1.12 Entrenching a strong ethical code 39
2.1.13 Capacity building 40
2.1.14 Domestic and international corporation and
collaboration 41
2.1.15 Strategic performance management 42
2.1.16 Joint tax board 43
2.1.17 Conditions for a good tax audit 44
2.1.18 Issues in Tax audit and Investigation 45
2.1.19 Main characteristics of audit 49
2.1.20 Need for tax audit 49
2.1.21 Tax audit function and resources allocation 52
2.1.22 Location of audit 52
2.1.22 Types of Audits 53
2.1.23 Approaches and standards of tax audit 54
2.1.24 Efficiency and effective tax audit 54
2.1.25 Tax audit and tax malpractices 57
2.1.26 Tax audit and investigation in Nigeria 58
2.1.27 Trigger points and management strategies 59
2.1.28 tax audit from an international perspective 62
2.1.28 The roles of the taxpayer audit programme 62
2.1.30 Annual audit plan 64
2.1.31 Methodology of auditing and investigation 65
2.1.32 Quarterly technology report 68
2.1.33 Reasons
or aims of instituting tax audit exercise 69
2.1.34 Practical approach to field audit 71
2.1.35 Distinction between tax and revenue 73
2.1.36 Tax revenue as a catalyst for Nigeria economy
Growth 75
2.1.37 Types of taxes in Nigeria 76
2.1.38 Elements of tax audit and investigation 77
2.1.39 Internally generated revenue 82
2.1.40 Tax administration and revenue collection strategy 84
2.1.41 Developing revenue strategy 92
2.1.42 Elements of tax administration and revenue
collection strategy 96
2.2 Theoretical Review 109
2.2.1 Reasoned action theory 110
2.2.2 The Planned behaviour theory 110
2.2.3 The Police theory 111
2.3 Empirical Review 111
2.4 Research Gap 123
Chapter
3: RESEARCH METHODOLOGY
3.1 Research Design 125
3.2 Area of Study 125
3.3 Population of the Study 125
3.4 Sample and Sampling Techniques 126
3.5 Source of data 126
3.6 Design and Administration of
Questionnaire 126
3.7 Description of the Instrument 127
3.8 Validity of the Research Instrument 127
3.9 Data Analysis Techniques 128
3.9.1 Model specification 129
Chapter
4: DATA PRESENTATION AND ANAYSIS
4.1 Data Presentation 132
4.2 Presentation of Result 136
4.3 Testing of Hypotheses 146
4.4 Discussion Findings 150
Chapter
5: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 160
5.2 Conclusions 161
5.3 Recommendations 162
5.4 Contribution to Knowledge 163
5.5 Area of further research 164
References 165
Appendices 182
LIST OF TABLES
Tables 1 Timeline of major tax reform in
Nigeria, 1900-2014 29
2 Population
of the Study table 125
3 Sample
size 127
4.1 Gender
of the respondents 132
4.2 Marital
Status of the respondents 135
4.3 Age
of the respondents 137
4.4 Education
qualification of the respondents 137
4.5 Group
affiliation of the respondent 138
4.6 effect
of tax audit and investigation on advance tax payment 140
4.7 evaluation
of tax audit and investigation on direct payment of taxes 141
4.8 Effect
of tax audit and investigation on self assessment 144
4.9 Ascertain
the determinant of tax revenue collection strategy 144
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The
relationship between the government and the governed is a social contract
(Onuoha & Dada, 2016). The government provides the basic social amenities;
protect lives and property of the people that have surrendered their
sovereignty to its authority. However, the government requires funds to finance
these provisions. The citizen’s play their parts by prudently paying tax via
provision of adequate information that will enable the government assess the
citizens for tax purpose or pay taxes voluntarily on self-assessment (Ewa,
2021). The money realized through the tax is normally utilized for the
provisions of basic amenities and for running cost of the government. Okoye
(2006), revenue is the live-wire of any successful undertaking not only for the
private sector but much also for the public sector. The function which
government must perform can only be discharged with resources in the form of
money and manpower. Such money is generated through effective taxation and this
must be collected and used to serve the entire citizenry (Tanui, 2016).
Okonye,
Azubuike and Akpan (2017), some of the major taxes by government are classified
as; fines, royalties, penalties, loans, grants, donations etc. These are termed
compulsory payment by individuals and organizations and the government
administer various tax revenue collection strategies in accordance with
predetermined laws (Owojori, 2006). Mu’azu
(2012) further reiterated that taxes are compulsory levy by government through
its agencies on the income, consumption and capital of its subjects. Oriakhi and Ahuru (2014) mentioned that these levies
are collected directly on personal income such as salaries, business profit;
advance/deductible at source via interest, dividend, discount or royalties; and
recently Ewa (2021) has raised the issue of self assessment method as an
efficient tax collection strategy. Tax is also levied against company profit,
petroleum profit, capital gains and capital transfer. Notably, the collection
of tax for the federal government is bestowed to the Federal Inland Revenue
Service (FIRS) in Nigeria and this agency on behalf of the government, device
tax collection strategies in order to ensure effective and efficient tax
revenue generation in Nigeria. But to a large extent there have been issues of
tax evasion and cases of citizens being reluctant to pay tax in Nigeria (Osemrke &
Nzekwe, 2020). This has led to decrease in tax revenue generation over the past
decade which as result, the FIRS introduced the tax audit department in 2006 in
order to enhance effectiveness in tax revenue collection strategies so as to
improve tax administration in Nigerian (Okonye et al., 2017).
According
to Onuoha and Dada (2016), the high level of corruption cases in Nigeria
indicates that many taxpayers have the instinct to report falsely on their
self-assessments in order to reduce their tax burden to the government. As a result, necessary efficient tax system
that would engage every person and organization in Nigeria to act responsibly
by paying the correct taxes and on time is put in place by the FIRS (Okoye,
2006). Growing issues of tax returns filed based on misrepresented data results
to wrong assessment. The establishment of tax audit and investigation
department by FIRS attempts to correct such abnormalities by making sure taxpayers
are appropriately assessed and taxed through effective and efficient strategies
(Ogbueghu, 2016), and that the government collects the complete and accurate
revenue due to it from all the legitimate forms of taxes on the citizens and
corporate organizations within the relevant jurisdictions (Obe, 2019). Mutarindwa (2014) further gave
credence to such preposition in his work where he posited that the primary goal
of every tax authority is to improve tax compliance through tax laws, and
ensures that confidence to believe that tax system and administration is fair.
Some of the tax audit strategies that enhance tax compliance for effective tax
revenue collection are; adequate record
keeping by taxpayer, having access to taxpayers books, adequate information and
powers to sanction tax offenders as a result of non compliance (Palil & Mustapha, 2011).
According
to OECD (2006), cases of taxpayers’ failure to comply with tax laws are always
there ranging from taxpayers’ ignorance, carelessness, recklessness and
deliberate evasion, or weakness in tax administrative laws which lays credence
to the reasoned action theory as propounded by (Fishbein & Ajzen, 1975). As a result, government and its citizens,
whom the tax is meant to serve, are denied of adequate tax revenue which is
required for the provision of public utilities. To correct such ill tax
practices, proponents of the policeman theory like Awe (2008) posit the
establishment of tax audit and investigation as a watch dog for tax
malpractices in order to strengthen tax revenue collection strategies in
Nigeria. Imperatively, most taxpayer-driven failures or compliance risks as
identified above have been addressed nearly exclusively in terms of regulatory
enforcement through an audit-based approach (Marlik,
2010; Mu’azu, 2012). In more recent times, tax
administrators have come to the realization that some of the factors underlying
taxpayers’ compliance behaviour in any specific risk area are varied and often
complex and are mostly unlikely to be treated successfully with a single
action, particularly one based exclusively on regulatory enforcement action
such as audit (Nwaiwu & Macgregor, 2018). Notably, tax audit is a major
tool for enhancing tax compliance and tax bodies in most developing countries
commit resources to tax audit practice as a tax administration mechanism (Okoye & Akenbor, 2012).
Prior
to 1998, taxpayers in Nigeria (persons and corporations) were assessed to tax
by the relevant tax authorities; a system otherwise known as government
assessment (Modugu & Anyaduba,
2014). With the introduction of self-assessment scheme into the Nigeria
tax system in 1998, taxpayers were required to file in their tax returns
independently. This practice informed the need for tax audit, to ensure taxpayers
file in accurate information regarding their income and expenses in business
and vocation. Taxpayers are inherently disposed to reducing their tax liability
either through tax evasion or tax avoidance (Omodero,
Ekwe & Ihendinihu, 2018). The idea of tax audit became known through
Lagos State where monitoring agents were appointed to carry out tax audit and
investigation on government behalf (Taiwo,
2011). The tax audit may be varied by way of desk or room audit or field
audit. With the introduction of self-assessment scheme by the Federal Inland
Revenue Service (FIRS) in 1998, taxpayers were given the opportunity to assess
themselves and remit the assessed tax to the government coffers voluntarily (Appah & Eze, 2013). In an effort to check
incessant abuse of the system, it became necessary to re-evaluate the claims of
the taxpayers through tax audit and investigation process and this cannot be
achieved without adequate strategies in place to encourage tax revenue
collection.
Tax
audit is similar to financial audit which involves the gathering of information
and processing information gathered for determining the level of compliance of
an organization or individuals taxpayers with tax laws within a given period of
time. Okonye, Azubuike and Akpan (2017) posited that to enhance tax audit and
revenue generation, effective tax revenue collection strategies must be put in
place by the government through its agencies.
1.2 STATEMENT OF THE PROBLEM
Theoretically,
it is assumed that taxpayers are expected to abide by tax laws by turning in
their taxes as at when due considering the economic benefits and incentives
like tax allowances accruable to the taxpayers as captured by extant tax laws
in Nigeria. Despite this theoretical postulate and the institution of the tax
audit and investigation department by the Federal Inland Revenue Service (FIRS)
in Nigeria 2006, the issue of tax evasion still linger. The adverse effects of
tax evasion on internally generated revenue in Nigeria cannot be overemphasized.
It is also a general believe that corruption, lack of transparency by tax
administrators and taxpayers have adversely affected the ability of the
relevant tax authorities to generate appropriate level of revenue from taxes.
According to Onuoha and Dada (2016), there has been high level of
non-compliance with tax laws involving both the tax administrators and the taxpayers
as well. This has encouraged the dwindling tax revenue accruing to government.
To ensure adequate taxes are collected from eligible taxpayers, tax authorities
implore various tax collection strategies. Through these strategies, effective
tax audit and investigation is enhanced so as to enable effective and efficient
tax revenue collection.
FIRS
instituted the tax audit and investigation department in 2006 to checkmate
malpractices in tax administration on both sides such that tax revenue will be
increased but to what extent such policy drive has affected internally
generated revenue in Nigeria is still unknown.
However,
the different findings reached and methodology adopted by some of researchers
who have carried out some works on tax audit and investigation phenomenon calls
for concern because of their failure to explore tax revenue collection
strategies. Mu’az, (2012), studied the effect of tax audit on
tax compliance in Nigeria specifically using Bauchi state board of internal revenue. He
failed to examine the various tax revenue collection strategies as he focused
more on compliance level. Onuoha and Dada (2016), whose work was on tax audit
and investigation as imperatives for efficient tax administration in Nigeria,
pointed out that tax audit and investigation exert important influence on
taxpayers to pay the correct tax liabilities to the government. But they also
focused on compliance level neglecting revenue collection strategies. Although
their findings in part contradict the positions Mu’az (2012), who posits that
tax audit and investigation encourages compliances. Onuoha and Dada (2016)
adopted an expository approach using content analysis of existing
literatures. Also, Adediran and Alade
(2013), took a research on the impact of tax audit and investigation on revenue
generation in Nigeria. Despite their findings that tax audit and investigations
curbs the problems of tax evasion, they failed to examine the tax revenue
strategies. Failure of these scholars to link tax audit and investigation to
revenue collection strategies necessitates the current study.
This
study intends to fill the theoretical and empirical gap by investigating the
effect of tax audit and investigation on strategies for revenue collection in
Nigeria. Tax
strategies are tactics directed to achieve tax income for the government in
order to achieve specific and planned goals.These tax collection strategies
include tax deducted at source or advance tax payment, direct tax payment and
self assessment tax.
1.3 OBJECTIVE
OF THE STUDY
The
main objective of this study is to examine effect of tax audit and
investigation on tax revenue collection strategy in Nigeria. The specific
objectives of the study are, to:
i.
Determine the effect of
tax audit and investigation components (record keeping obligation, Access to
taxpayers records, Access to third parties information, Information from other
countries Revenue authority Power to amend taxpayers’ claims and Sanction for
non-compliance)on tax deductions at source/ advance tax payment in Nigeria.
ii.
Evaluate the effect of
tax audit and investigation components (record keeping obligation, Access to
taxpayers records, Access to third parties information, Information from other
countries Revenue authority Power to amend taxpayers’ claims and Sanction for
non-compliance)on direct payment of tax in Nigeria.
iii.
Determine the effect of
tax audit and investigation components (record keeping obligation, Access to
taxpayers records, Access to third parties information, Information from other
countries Revenue authority Power to amend taxpayers’ claims and Sanction for
non-compliance)on self assessment tax payment in Nigeria.
1.4 RESEARCH QUESTIONS
The
following research questions are set to be answered;
i.
What effect does tax
audit and investigation components (record keeping obligation, Access to
taxpayers records, Access to third parties information, Information from other
countries Revenue authority Power to amend taxpayers’ claims and Sanction for
non-compliance) have on tax deductions at source/ advance tax payment in
Nigeria?
ii.
To what extent do tax
audit and investigation components (record keeping obligation, Access to
taxpayers records, Access to third parties information, Information from other
countries Revenue authority Power to amend taxpayers’ claims and Sanction for
non-compliance) affect direct payment of tax in Nigeria?
iii.
What effect does tax
audit and investigation components (record keeping obligation, Access to
taxpayers records, Access to third parties information, Information from other
countries Revenue authority Power to amend taxpayers’ claims and Sanction for
non-compliance) have on self assessment tax payment in Nigeria?
1.5 HYPOTHESES
The
following hypotheses are to be tested:
Ho1:
Tax audit and investigation components (record keeping obligation, Access to
taxpayers records, Access to third parties information, Information from other
countries Revenue authority Power to amend taxpayers’ claims and Sanction for
non-compliance) have no significant effect on tax deductions at source/ advance
tax payment in Nigeria.
Ho2:
Tax audit and investigation components (record keeping obligation, Access to
taxpayers records, Access to third parties information, Information from other
countries Revenue authority Power to amend taxpayers’ claims and Sanction for
non-compliance) have no significant effect on direct payment of tax in Nigeria.
Ho3:
Tax audit and investigation components (record keeping obligation, Access to
taxpayers records, Access to third parties information, Information from other
countries Revenue authority Power to amend taxpayers’ claims and Sanction for
non-compliance) have no significant effect on self assessment tax payment in
Nigeria.
1.6
SIGNIFICANCE OF THE STUDY
The
research work will be of great significant in various ways but most
specifically the study will be of importance to;
Government:
the government of federal republic of Nigeria will need the result generated
from the research and the recommendations to improve on the internally
generated tax revenue laws. The Federal Inland Revenue Services in particular
will benefit from the research work, which will provide such information on the
meaningful way to strengthen the audit department with the view for efficient
and effective service delivery.
Taxpayers:
taxpayers will also benefit immensely from the research work. They would be
enabled by the research work to see reasons why voluntarily compliance with
payment of taxes is important as well as being objectives with their tax
claims. Again, the public shall be
informed through the study recommendations of benefit accruing from prompt and
objective compliance to payment of taxes and the utilization of tax revenue.
Academics:
This study will develop more of tax audit and investigation theories, concept
and methodology that will further enhance the knowledge of academics on tax
audit and investigation topic. The study will also serve as a reference point for
further research.
1.7
SCOPE OF THE STUDY.
The research covers the meanings of tax audit and
investigation in Nigeria and tax collection strategy in Nigeria. It also paid
attention on how tax audits and investigations can help increase tax revenue
collection in Nigeria through efficient tax collection strategy.
The focus was
on Nigeria’s tax system although a few references were made to other countries.
The study involved a survey which was used to generate expert opinions on the
issue through a questionnaire.
Questionnaires raised were administered to only FIRS
offices within the selected states in South Eastern region of Nigeria as a
result proximity to the research.
1.8 DEFINITION OF OPERATIONAL TERMS
Internally Generated
Revenue:
This implies all sources of revenue being generated by federal
government from all the domestic sources. This includes the following: All
forms of taxes, fines, disposal of federal government properties within the
countries etc.
Tax Investigation:
This is a special kind of tax audit, which has an objective of evaluating a
particular issue as reported or suspected in other to affirm or otherwise, what
was reported or suspected if necessary gather evidence for prosecution of tax
offences.
Tax Audit:
This is a routine check on claims submitted by taxpayer by tax officer to
ascertain if such claims are in line with tax laid down rules.
Taxpayers’ record keeping
obligation: This refers to the level at which it
is expected of a taxpayer to keep adequate accounting books for tax assessment
as prescribed by extant laws.
Access to taxpayers’
books and records: This entails the ability
of taxpayers to make available all relevant books of account to the tax
authorities for assessment of tax obligation as prescribed by extant tax laws
in Nigeria.
Access to third party
information source: This refers to instances
whereby tax authorities have to source for information about a taxpayer from
another individual or firm in order to enhance tax compliance.
Access to information
from other countries revenue authorities:
In the absence of information about a resident, tax authorities get information
about the taxpayer from his/her country of origin.
Powers to amend returns
from taxpayers’ claim: This refers to the
constitutional mandate bestowed on FIRS to recompute and adjust figures on tax
return claims of taxpayers.
Sanctions for non
compliance: This refers to the varying legal
actions taking against tax defaulters by FIRS in order to ensure tax
compliance.
Tax deduction at
source/advance tax payment: This is a tax collection
strategy that enables tax deduction immediately payments on rent, commission,
interest, professional fee, salaries e.t.c are paid.
Direct tax payment:
Direct tax payment are taxes remitted by taxpayers immediately income is
earned, properties or assets are sold.
Self assessment:
self assessment refers to situations whereby taxpayers are allowed by law to
compute their tax returns due for the relevant tax year and submitting same to
tax authorities for assessment.
1.9 LIMITATION OF STUDY
The
study involved travelling to all the States within the South East geo-political
zone in the bid to obtain data needed for the realization of this research,
however, due to travelling restrictions imposed on inter-state movement as a
result of COVID 19, it became almost impossible to obtain such data.
The
COVID 19, also affected the income stream of the researcher. This created
serious financial limitation.
Most
of the respondents were skeptical of the purpose of the research and refused to
fill the questionnaire.
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