The pain of a tax audit

Uganda Revenue Authority (URA) has carried out many audits for taxpayers in varied sectors, in the last six months and this trend is likely to continue in 2023. But what are tax audits?

Tax audits refer to reviews conducted by the tax authorities to probe, assess and analyse the relationship between information declared in the filed self-assessment returns and the actual support maintained for both revenue and expense in the form of ledger breakdowns and executed documents such as invoices, receipts and agreements for a given period. Tax audits may cover one tax type or all tax types.

The tax regime in Uganda is to a great extent a self-assessment regime. This means the primary duty to assess one’s tax liability is a responsibility of the taxpayers. For most of Uganda’s tax laws covering taxes such as income tax both for companies and for individuals, Value Added Tax (VAT), Excise Duty and customs duties among others, the taxpayer is in a position to assess the tax that is due in line with the guidance provided by the respective tax law and communicate the tax position to URA through a prescribed form known as a tax return or declaration.

The tax man has a right to review the self-assessed tax and contest it, if not in agreement, through issuance of an additional tax assessment. The assessment may be because of a simple desk review or a comprehensive tax audit.

The Income Tax Act and VAT Act require taxpayers to keep information of their business affairs for a period of five years. In practice, the URA conducts audits on the taxpayer information for three  year periods but could extend these audits to five years and beyond in instances where unpaid tax, fraud or wilful neglect is identified.

What triggers tax audits?
Audits by URA may be due to identified red flags or because of a targeted sector audit approach.

Some of the red flags that lead to audits include unreconciled tax positions with URA, declarations in a taxpayer’s self-assessment return not aligning with the declarations in another return relying on similar information. For example, not reconciling staff costs in Pay As You Earn (PAYE) returns with staff costs in the income tax return could result into queries by the tax authority. Other red flags include non-filing of tax returns or even non-compliance with amendment of the tax law requiring change in tax treatment on transactions, among others.

Audits may also be conducted as part of tax refund applications, Tax Identification Number (TIN) deactivation processes, tax exemption application processes or as part of general compliance.

Consequences of audits
From experience, most taxpayers are wary of tax audits and would rather not be audited. This is because audits consume valuable time. They involve provision of information, attending meetings to discuss findings and reconciliations of audit findings, amongst other procedural issues. During audits, taxpayers maybe required to trace information from the archives for prior years which is time consuming. Additionally, some taxpayers find it challenging to explain transactions executed by staff who have since left the organisation. The above consequences may in turn result into additional tax for the taxpayer.

Despite these challenges, it is not wrong for a taxpayer to be audited by the tax authority. Like statutory audits of financial statements, tax audits have advantages too. Some of the advantages include knowing the compliance status of the taxpayer for the audited period. Where liabilities are discovered at a future date, audits prevent an accumulation of penalties and interest that would befall the taxpayer. Additionally, the taxpayer upon coming to light of the non-compliance issues from the audit has an opportunity to correct them and start their compliance journey on a clean slate.

The taxpayer must know and accept that the tax man is undertaking their rightful duty and it is okay to be audited.  

Managing tax audits
The best way to manage tax audits is to prepare beforehand. This can be done by carrying out reconciliations long before the audits are initiated and maintaining documentation with the hindsight of all stakeholders who would want to review it later.

Taxpayers should also reach out for professional help from their tax advisors to guide them when tax audits are initiated. This will help save the taxpayer an enormous amount of tax and time.

Tax saving normally arises from appropriate interpretation of tax laws which most taxpayers may not know about, but also may have ignored or may have been misinterpreted by the tax authority when imposing additional taxes. With this view, taxpayers will be able to comply with their tax obligations long before they are audited.

The author is tax manager with KPMG Uganda.