Tax audit and tax investigation: stages, powers, documents, back duty and appeals

A letter arrives from the Nigeria Revenue Service (NRS) asking a company to explain its hotel expenses and to confirm that its input VAT matches the invoices. Six months later two officers come to the company’s office, with a list of records and a date. Separately, a different company hears that officers will arrive with a warrant, without notice, and will take its books.

The first visit is a tax audit and the second is a tax investigation. They look similar from the outside, but the aim, the powers, the stages and the risks are very different, and the exam asks you to separate them.

This topic covers the purpose and types of tax audit, the stages of a field audit, the technical procedures, the audit programme, tax investigation and its stages, the investigation and intelligence units, the legal basis in the Nigeria Tax Administration Act (NTAA) 2025, the differences between audit and investigation, the documents the NRS and state services ask for, tax health checks, ethics, and the assessment, objection and appeal steps that follow.

The previous topic covered tax planning, avoidance and evasion. The next covers ethics and professionalism in tax.

Key terms in plain English

Syllabus check

This topic is in syllabus area E (tax management and planning, 10% of marks). It covers:

• the objectives and conduct of tax audit and the stages and powers of tax investigation;
• the legal basis, the documents required and the differences between audit and investigation;
• assessment after audit and investigation, objections and appeals.

CAMA 2020 and tax audit

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

Statutory audit and tax audit

A statutory audit is an independent examination of the books to give an opinion on whether proper books are kept, the statements agree with them, the law and accounting standards are followed and the statements give a true and fair view. A tax audit is a routine examination by the tax authority of returns, records and other documents to verify that the taxpayer has correctly reported its tax.

It keeps confidence in self-assessment and raises voluntary compliance. Its outcome is often a reassessment, or a referral for investigation if evasion is suspected. Tax audit departments exist in the NRS, the State Internal Revenue Services and the FCT Internal Revenue Service.

Objectives. To establish whether adequate books and records exist to fix profit and tax; whether the computations agree with the records; and whether all tax laws are followed. Others: educate taxpayers; discourage evasion; find and correct errors; give feedback on the law; identify fraud for investigation; stop failure to file or incomplete returns; and encourage voluntary compliance.

Types of audit

• Desk audit. Done in the tax office on the return when it is received, to check completeness and obvious errors. The result is a query letter or desk audit report to which the taxpayer must respond within the stated time, or ask for more time. A reconciliation meeting may follow. If the taxpayer cannot support the return, an additional assessment may follow, or a field audit.
• Field audit. More elaborate, at the taxpayer’s premises, so that officers can examine documents and put questions to staff.

By scope, an audit may be a routine sector audit (companies in one industry, to measure compliance), a routine zonal audit (all companies in a zone), or a special purpose audit (to verify a refund claim, settle a dispute, check suspected evasion, test VAT or follow a management directive).

Stages of a field audit

1. Selection. A management decision. Criteria: no audit for at least two years; refund claims, for example excess withholding tax credits; nil returns or continuing losses; low tax adequacy ratios; sector checks; leads from intelligence; transfer pricing, tax planning schemes and treaty claims; related or secondary files; poor or unusual performance; referral from a desk audit; random sampling; unusual decisions such as centralising operations; and directives from higher authority.
2. Preliminary review of the file. Background facts (company name, addresses, incorporation and commencement dates, tax file number, business, auditors and consultants, bankers, share capital and shareholders, directors, associated companies, litigation, last audit period, year end); analysis of the last report, financial statements and returns; ratios; and a plan of approach, days, skills and team. The team prepares checklists, an interview format and duties.
3. Notification. A letter stating the years covered, the records to be ready (the list is not exhaustive), the start date and time, and the officers’ names. Officers carry identity cards, shown on request but not surrendered or photocopied. The taxpayer acknowledges and confirms the date or asks for another.
4. Pre-audit meeting. With management and the tax consultant. It explains the purpose, confirms background, learns the accounting and operating systems (manual or computerised, cash or accrual, invoicing, banking of cash intact), hears the taxpayer’s views and asks for co-operation. Minutes are signed by all.
5. Fieldwork. Review of the listed records and requests for more, with explanations sought.
6. Post-audit meeting. To get outstanding information and answer open questions; minutes signed; the team leaves.
7. Interim report. A preliminary report on material issues, and after fieldwork an interim report of findings that may produce additional tax and of likely disputes.
8. Post-audit review. Technical review of findings against the law and accounting principles.
9. Reconciliation meetings. To settle outstanding issues and fix the additional tax. Additional assessments follow, and an objection leads to an amended assessment or a notice of refusal to amend. Due process and records must be kept to defend an appeal.
10. Final audit report. Signed by the head of audit, with the agreed and disputed additional assessments listed separately by tax (company tax, withholding tax, VAT, PAYE and so on) and year, how each was reached and recommendations, which may include an extended audit, investigation or prosecution. It supports the authority’s case before the Tax Appeal Tribunal.

Ratios and warning signs. The reviewer uses liquidity, efficiency, gearing and profitability ratios, and looks for understated income, overstated expenses, undervalued stock, secret reserves, post-dated sales and omitted income.

Technical procedures

Cases are allocated by competence, urgency, complexity and size. The scheduled officer extracts data from the assessment and collection files and writes a file review report. Circularisation letters may go to third parties. A team and leader do the fieldwork.

After reconciliation the authority sends a final letter of intent with its position and the computation; the assessment department then raises additional or revised assessments and the collection department chases payment. Objections trigger a review of the working papers and sometimes a revisit; a refusal to amend needs headquarters’ approval, and the case may go to the legal section.

The final report covers background, tax adequacy ratios before and after, work done, findings, yield, recommendations and conclusions.

Audit programme

A schedule of the work to be done on each part of the accounts. It sets out each member’s tasks, shows what is done and what remains, records who is responsible, helps supervision, keeps the work going when staff change, helps the team leader allocate staff and manages time.

Tax investigation

An investigation is a wider enquiry to recover tax undercharged in earlier years, usually on reasonable suspicion of fraud, evasion or wilful default, and sometimes at random. It is not routine; a company is audited each year in effect, but may not be investigated for years. Its aim is to expose the full circumstances and to obtain evidence for prosecution.

Investigators have special training and greater powers than auditors and may ask the police for help.

Triggers: failure to register; refusal to file despite requests; refusal to give access to books; abusive or aggressive avoidance schemes; suspicion of fraud; denial of access to an audit; sanction by a regulator such as the Central Bank, NDIC, SEC or NCC; failure to remit VAT or withholding tax collected; adverse media reports; whistle-blowers; and referral from an audit or a law enforcement agency.

Stages:

1. Surveillance or pre-investigation: discreet checking and analysis of data and complaints, done quickly.
2. Notification: the years, the records, the date and time and the officers.
3. Pre-investigation meeting with management and the consultant, with signed minutes.
4. Evidential audit: in-depth work at the premises, taking charge of evidence, a warrant of arrest if needed, interviews and searches.
5. Case preparation: collating evidence, questioning suspects and analysing seized documents; the case can still be dropped if evidence is weak.
6. Arraignment: criminal prosecution in court.
7. Termination at any stage if evidence is insufficient, there is no criminality (what happened was avoidance, not evasion), the case becomes statute-barred, or the suspect dies or becomes insane.

Investigation and intelligence units

The NRS Investigation and Intelligence Department runs investigations and sets policy. Its head sets strategy, case referral procedures and proactive checks, deals with new fraud such as e-commerce, keeps records, trains officers, partners with other jurisdictions and agencies, supports prosecutions and recommends amendments to close leakages.

• Civil investigations unit: avoidance schemes (artificial transactions under s. 46 NTAA, offshore companies set up to divert profit, treaty shopping, back-to-back loans, inflated purchases of foreign assets, tax havens, income splitting), refund cases and mergers; issues warrants for search and seizure; refers deliberate evasion to the criminal unit.
• Criminal investigations unit: evasion with mens rea: premeditated arrangements, understating income, overstating expenses, fictitious assets, artificial transactions, non-filing and denial of access. It also handles fraudulent diversion of withholding tax and VAT, false credit notes and fraudulently obtained tax clearance certificates; carries out search and seizure; and works with the NDLEA, EFCC, NDIC and CBN on white-collar crime such as money laundering.
• Intelligence unit: gathers and analyses information, including from banks and the Corporate Affairs Commission on new accounts (NTAA s. 29), government contract data, the media and offshore company accounts, and refers cases to the other units.

Strengths: management support; skilled and honest officers, many accountants, economists and lawyers; enforcement powers; legal unit support. Weaknesses: interference; obstruction through the courts; conflict between audit and civil investigation; delays from taxpayers; weak funding, experience, infrastructure and power; and reliance on outside agencies.

Legal basis

• NTAA s. 57: the authority may by notice require a taxable person to deliver a return, appear for examination, produce books, documents, records and information, give information orally or in writing, and grant access to electronic records, including cloud facilities. The time allowed is at least seven days from service. The authority may verify any entry by audit or investigation, including digital records.
• NTAA s. 64: the power to investigate any violation of tax law, whether or not reported; to employ special purpose tax officers and seek the help of law enforcement agencies; to look into the property of a person whose lifestyle is not justified by his income; and to prosecute offences.
• NTAA s. 48: authorities share information and, on finding non-compliance in a tax that belongs to another authority, refer it or invite a joint audit.
• NTAA s. 61: once an assessment is final and a demand note is served, the authority may seek court power to distrain the taxpayer’s goods, chattels and securities and land and premises, and to sell what is distrained. The goods may be kept for 14 days at the taxpayer’s cost, proceeds meet costs, tax, penalty and interest, any balance is paid on demand within one year, and immovable property is sold only on a High Court order.
• Search and seizure: on reasonable suspicion of non-disclosure or an irregularity, the authority may authorise officers to enter, by force if needed, the taxpayer’s premises, offices or residence, or those of principal officers, agents or representatives, under the prescribed warrant in the Second Schedule, to seize anything reasonably needed to fix the correct tax or as evidence, with police help.

Audit and investigation compared

Documents requested

Tax health check

A health check is a voluntary review of the taxpayer’s records to test compliance, quantify exposure and recommend improvements. The steps are to understand the business, set the scope (accounts, contracts, returns, correspondence, payments and receipts, and a report to management), set a timeline, gather complete data, analyse it, identify risks and opportunities (including refunds), write a report with remedies and implement it at once.

It finds hidden risks, quantifies possible back tax, helps to settle liabilities with the authority and supports planning and audit readiness.

Ethics and the practitioner

The practitioner must follow the ICAN code (see the ethics topic): integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. He must not tolerate or help evasion, must advise a client against an arrangement likely to produce evasion and must withdraw if the client will not follow that advice.

His role is to apply the law to transactions fairly and to communicate with the client, the authority and others in line with the engagement.

Assessment after audit or investigation

If a taxpayer was assessed at less than the proper figure, the authority may raise an additional or back duty assessment, normally within six years. It arises where the records, reviewed on audit, differ from the returns, because of error, fraud, wilful default or neglect. It can be objected to and appealed.

Back duty work is limited to six years before the year of the audit, while an investigation has no such limit.

Valid objection: in writing; within 30 days of service of the assessment; stating the grounds and the revised figure. If the authority agrees, the assessment is discharged and an amended one raised. If not, it issues a notice of refusal to amend.

Appeal: to the Tax Appeal Tribunal in writing within 30 days of the notice of refusal, with notice to the authority and the Tribunal’s secretary. The notice gives the assessment number and year, the tax charged, the total profit, the date the refusal was served, the grounds (as in the objection) and an address for service. Hearings are in public and each side may use auditors, consultants and lawyers.

A further appeal on a point of law goes to the Federal High Court within 30 days, then to the Court of Appeal and the Supreme Court.

Final and conclusive when no objection or appeal is made in time; when an objection ends in agreement on the figure; or when a Tribunal or court has decided it and no further appeal lies.

Worked examples

1. (a) A desk audit query: routine, in the office, and the company must reply within the time stated.
2. (b) A tax investigation: suspicion of fraud, a surprise visit, a warrant under the Second Schedule and the aim of evidence for prosecution.

1. The objection must be made within 30 days of 3 March, so by 2 April.
2. After the notice of refusal on 20 April, the appeal to the Tax Appeal Tribunal must be lodged within 30 days, by 20 May.
3. If the company loses on a point of law, it has 30 days from receiving the Tribunal’s decision to appeal to the Federal High Court.

1. Back duty work reaches back six years before the year of the audit, so it can reach 2020 onwards.
2. The 2022 omission is within the window and can be assessed.
3. The 2019 omission is outside it unless fraud or wilful default is shown, in which case an investigation has no such limit.

1. The time in the notice must be at least seven days from service.
2. The earliest date it can require production is 8 June.
3. It may also require access to electronic and cloud records.

How to score full marks

• Name desk or field audit, or investigation, first, and say why.
• List the stages in order and give the purpose of each in a phrase.
• Cite NTAA ss. 57, 64, 48 and 61 for powers.
• Use the table of differences for a compare question.
• Give the 30-day steps in the right order: objection, notice of refusal, appeal.

Common mistakes in the exam

• Calling a desk audit a field audit.
• Mixing the pre-audit meeting with the post-audit meeting.
• Stating the investigation as routine.
• Forgetting that back duty is limited to six years and an investigation is not.
• Giving 60 days for an objection.
• Writing that a notice of refusal comes before the objection.

Quick revision

• Audit: routine; desk or field. Investigation: suspicion; criminal.
• Ten audit stages from selection to final report.
• Seven investigation stages from surveillance to termination.
• NTAA ss. 57, 64, 48, 61; seven days’ notice.
• Back duty: six years. Objection 30 days; appeal 30 days.
• CAMA 2020: ss. 119, 305, 308, 377(1), 378.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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