When the tax man comes calling: Fight or flight?

3 years ago

What do you do when you receive that dreaded call that Kenya Revenue Authority officials will be undertaking an audit of your business? Do you close down your business, shave your head and disappear to the mountains to live the rest of your life as a monk? Absolutely not! A tax audit is an unavoidable component of your business life. So don’t panic. Tax audits have become more frequent as KRA tries to meet ambitious revenue targets set by the government. A tax audit will be focused on three main issues: whether you have filed returns for the tax obligations you are registered for, if you have underpaid tax and if you have underreported your business income.

First, being selected for a tax audit is not a bad thing. It’s an indication that your business is doing well. The taxman will rarely audit a loss-making, struggling business unless there is suspicion of tax evasion. So for your business to be selected for an audit, it must be a healthy business and the taxman just wants to confirm that you have made the correct tax payments as required by law.

The other thing that business people are not aware of is that you can invite the tax authority officials to come to your business and carry out an audit. This is necessary when you have overpaid tax and you need to claim a refund. The refund will not be authorized until the taxman carries out an audit to verify that indeed the tax overpayment is valid. Since the overpaid tax may be causing cash-flow challenges, it is in your best interest as a business person to have the tax audit carried out as soon as possible and your tax refund processed.

Below are a few tips that you can follow as you prepare for a tax audit:

  1. Keep proper books of account- It is absolutely necessary for a business person to ensure that proper books of accounts are maintained. Simply put, business records should be maintained in such a way that you can support the income earned by the business and the expenses incurred.
  2. Schedule the audit process at least a month later – When you get a notification for the audit, it is unlikely that the auditors will come in the next day. Schedule the audit process to commence at least 4 weeks later. This gives you time to compile the required documents in readiness for the audit.
  3. Engage a qualified and experienced tax consultant - If you do not have any finance or accounting background, you may be unable to respond appropriately to some tax queries. It is advisable to retain the services of a professional consultant during the preparation and throughout the audit period.
  4. Propose a payment plan.  You are allowed to negotiate with the tax authority a payment plan that enables you to stagger the payments over a period of time. This is a favorable arrangement that does not force your business into a working capital crisis.

If you are in business you should expect a tax audit sooner or later. Start complying with the tax regulations early and you will have nothing to fear when the taxman comes calling.

Stephen Kimani, CPA-K                

Tel. 0700 053980