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What Is a Tax Audit?

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What is a tax audit? -One of the concerns of many taxpayers is the possibility of an audit by the IRS.  A tax audit is an examination of the tax return of an organization or individual to verify that financial information is properly reported.

What causes you to get audited by the IRS?

  While the chances of being singled out for close discrimination are statistically low, certain factors may increase your odds of being subjected to scrutiny.  Fortunately, there are measures you can take now to reduce the likelihood that the IRS will scrutinize you and your business.

  The Tax Department aims to implement the taxes that fall within its mandate in a professional, reliable and impartial manner.  Estimating and deducting taxes is based on information provided by the taxpayers themselves and by third parties.  We organize taxes in a way that, in addition to actual taxes, leads to the lowest possible cost and inconvenience to the financial operations of enterprises. 

To ensure that taxes are collected in the correct and timely amount, we use a number of control measures.  Tax control protects the interests of tax recipients and ensures that taxpayers bear the tax burden fairly and equally.  Tax audits also seek to improve taxpayer compliance so that taxpayers’ ability and willingness to take care of their tax liabilities can be improved.

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Audit Period

  Only the last 6 calendar years / fiscal years preceding the audit request may be examined during the field audit, if those years have not been previously audited.  In the event that the audit is performed for previous years, the audit shall be limited to the previous financial years.  For example, an audit request might be in 2017 for the year 2016 only or from 2010 to 2016.

  The relevant tax authority (RTA) does not usually conduct field audits for the same period twice, however, there are isolated cases where this has occurred, usually due to administrative directives issued by the RTA.  Also, if fraud is suspected, an investigation can take place despite an audit in a previous year.

  Audit Notification

  The Roads and Transport Authority usually notifies taxpayers of its intention to conduct a field audit exercise at least two weeks before the start of the audit process by sending a formal note specifying the period to be audited, date to start the audit, and the checklist.  Audit schedules may be extended at the request of the taxpayer, and in such case, another official note may be sent to the taxpayer by the RTA to inform about the acceptance of the proposed new schedule.

What Is a Tax Audit?

  The procedures consist of investigating whether correct and sufficient information has been provided for tax purposes and fulfillment of payment obligations.  Audits cover the type and extent of the activity in question, as appropriate, the way in which it was entered into the accounts, and whether the information in the accounting records has been properly reported to the Tax Department.  In this way, the overall reliability of the accounting comes under scrutiny.

What Is a Tax Audit?

  Tax audits can be divided into four different types:

  1. Correspondence audit: This is the least risky type of tax audit.  Correspondence audit refers to the IRS requesting additional information to verify the accuracy or details of your tax return.
  2. Office audit: An office audit refers to a personal interview with an IRS manager to process your audit.  To avoid making statements that could be used against you, it is highly recommended that you consult an attorney or tax professional before attending your interview.
  3. Field audit: This is the most dangerous type of audit because IRS agents will visit you at home or at work.  They might ask to see things about the tax that you reported.
  4. Random audit: As mentioned above, tax returns can be randomly selected for audit.  A random check is performed without any particular reason.  The IRS auditor will review the entire tax return to ensure the information is entered correctly.

  Because of their lack of experience with the IRS, individuals tend to provide too much information to IRS agents, which may ultimately harm them.  Experts recommend getting a tax attorney to help solve the audit.  A tax attorney will only provide the agent / auditor with the limited information requested in an orderly manner, which limits the amount of information that comes under IRS examination.

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What happens if you get audited?

  There are three possible outcomes of an IRS audit.  If the IRS is satisfied with the explanations and documentation you provide, nothing will change your tax return.  If the IRS suggests changes to your tax return, you can either agree to and accept the changes or challenge the agent’s evaluation.  If you agree, you will sign an inspection report or other form provided by the IRS and put in place some type of payment arrangement.  If you disagree with the results, you can set up a conference with the IRS Director for further review of your case or you can request a formal appeals conference.

What Is a Tax Audit?

  A typical tax audit involves reviewing taxpayer records to ensure compliance with relevant tax laws.  It is usually not more than 6 years old from the date of filing the relevant representations or receiving the audit notice.  Whereas a tax investigation is an investigation of taxpayers’ tax activities by the IRS to recover reduced taxes from previous years, which were launched based on suspicion of fraud or intentional default of the taxpayer in relation to non-compliance with tax obligations.  There is no time bar for investigations as such investigations can go back to the date of the incorporation of the company.

  Aside from the routine compliance review conducted by the tax authorities, typical tax audits in Nigeria consist of two forms – desk audit and field audit.  A desk audit usually involves the IRS conducting a review of self-assessment returns submitted by the taxpayer to ensure they are complete and correct without physically presenting the taxpayer’s place of business.  Under desk audits, tax authorities usually require clarifications and documentation from the taxpayer regarding the information contained in the taxpayer self-assessment returns.

  On the one hand, a field audit is a more detailed process that involves an actual visit to the taxpayer’s residence.  Please note that revenue authorities such as FIRS and LIRS use consultants called tax audit oversight agents to assist with the tax audit process.

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