Selection for audit is based on risk profiles, with considerations including but not limited to the following factors:
- Consistency in tax remittances gauged through trend analysis;
- Bench marking against sector or industry statistics;
- Intelligence gathering including information supplied through the KRA’s Information Reward Scheme;
- Industry/ sector peculiarities – such as prevalence of cash transactions, offshore activities;
- Special considerations – such as large investment deductions or transfer pricing for multinationals;
- Compliance record determined through results of past audits, nil and non-filer returns;
- Record of persistent losses;
- Random selection.
Audits are generally carried out within the taxpayer’s premises and they could either be comprehensive or single-issue audits. Future policy will see audit mix shifting more towards the latter in order to achieve better resource utilization. In addition, audit effort will become focused more on taxpayers with poor compliance records and those whose profiles depict them as falling into risky categories.
The following general procedures are observed in carrying out an audit:
- Notification to the taxpayer specifying the commencement date, areas to be audited, period to be covered and documents required;
- Commencement with familiarization visit and initial interviews;
- Detailed examination of records and discussion of findings with the taxpayer and agent – issues may be agreed or not agreed;
- Notification of audit findings and issuing of assessments;
- Recovery of resultant tax or referral to dispute resolution mechanisms (objections and appeals processes in tribunals or court).
What is expected of a tax auditor?
- To give a written notification of the intention to audit and what will be required;
- To record all deliberations and give copies to the taxpayer if required;
- To act with courtesy and to adhere to the requirements of the Taxpayer’s Charter;
- To consider cooperativeness in providing information in mitigation;
- To provide full information on the audit findings including taxes, interest and penalties due;
- Listen to explanations provided on matters related to the audit.
What is expected of the taxpayer:-
- To co-operate and promptly respond to inquiries to enable establish the correct position expeditiously;
- Obtain assistance from a tax agent of their choice and be accompanied by them whenever needed;
- Seek explanations on the audit process of the audit and have access to an exit interview during which findings are discussed.
OBJECTIONS & APPEALS
These apply where a taxpayer disputes an assessment, in which case the following considerations must be fulfilled:
- Objection must be received within 30 days of the date of issue of an assessment;
- Precise (not generalized) grounds for objection must be stated;
- Objection must be accompanied by relevant supporting evidence;
Upon its receipt, an objection may be disposed of in any of the following ways:
- The assessment may be amended in accordance with the objection;
- The objection may be declined in which case the matter moves to dispute resolution.
A taxpayer dissatisfied with the manner in which an objection has been dealt with is required to appeal to the Local Committee (Income Tax cases) or Tribunal (VAT cases) within 30 days after the date of communication of the outcome. Further appeals can be made to the High Court for those yet dissatisfied.
TAX REFUND AUDITS
Refund audits may be carried out before or after payment. As with regular audits, refund audits will become more risk-driven with high risk cases undergoing mandatory pre-payment audits.
Refund audits mostly focus on confirming the accuracy of the claim and its conformity with legal requirements.