In the recent past, the government has been on a drive to raise more money through taxation. Kenya Revenue Authority the body tasted with the collection of taxes in Kenya has been doing an audit by reviewing filed taxpayers’ tax returns records. Where the taxman finds inconsistencies with the filed returns, an audit is raised by the KRA investigation enforcement unit. The taxpayer is sent a communication to support filed returns within a specified timeframe. In this article, we will explore more on KRA Tax Audit, What triggers the Audit and how to respond to the audit.
What is KRA Tax Audit
This is an exercise where KRA reviews tax returns filed by taxpayers to catch tax cheats for both individuals and corporates. The process involves scrutiny of declared incomes and claimed expenses against the actual incomes and expenses for a specified timeframe, often 5 years. The Tax Procedures Act required that taxpayers must keep records for a period of a minimum of 5 years.
The Law States:
A person shall;
- Maintain any document required under tax law, in either of the official languages,
- Maintain any document required under tax law to enable the person’s tax liability to be readily ascertained; and
- …Retain the document for five years from the end of the reporting period to which it relates …
What Makes KRA audit Taxpayers’ Tax Returns?
To meet revenue targets the Kenya Revenue Authority (KRA) is now undertaking in-depth compliance audits on all taxpayers through the investigation enforcement unit.
KRA Additional assessment
The outcome of a KRA Audit includes additional assessments or in the case of fraud; prosecution of the offenders. Additional assessment happens when a taxpayer is unable to support all the claimed expenses and/or the taxpayer has underdeclared income. The additional assessment is raised by KRA officials for the under-declared income and/or the over-claimed expenses. The taxpayer is expected to pay the resultant tax including interest and penalties.
What triggers KRA to conduct audit on a taxpayers tax returns
KRA Audits may be triggered or caused by several factors which include and not limited to the following;
- Claiming for Tax Refund
- Late filing and payment of taxes
- Declaring losses for a number of years
- VAT inconsistencies
- Adverse movement in income declared
- Increase in revenue declared that may lead to change in taxpayer category
- Filing nil returns
Compliance Audits cover issues on Income Tax (individuals or corporate companies), VAT, Customs Duty, Excise, PAYE, and Withholding taxes (for professionals e.g. Doctors)
How to avoid KRA audits
Non-compliance can be avoided by ensuring adherence to the following:
- Engage professionals for advice on all matters of tax compliance, where necessary
- Pay taxes within the stipulated timelines;
- Avoid under-declaring income and/or over-claiming expenses when filing returns
- Paying instalment taxes within the stipulated timelines;
- Perform monthly reconciliations for sales, payroll, and withholding tax and address any gaps before the year-end.
How to go about responding to the KRA audit verification letter
Every taxpayer needs to know how to manage and handle KRA tax audits. In case you get a KRA Audit verification letter consider the following;
- Seek professional advice before responding to the KRA Audit letter
- Prepare for KRA compliance responses within the stipulated timelines as per the KRA audit verification letter;
- Gathering all necessary support documents that may be required for the KRA audit.
Always ensure your responses adequately address all the issues raised by KRA in the letter
Responding and resolving to KRA queries and audit takes both time and human resources Additionally, where there are instances of non-compliance interest (Sec 38 TPA) and penalties (Sec 83 (a) TPA are levied. These penalties and interest are usually backdated to the respective years that noncompliance is noted.
To avoid being on the wrong hand with the taxman, it’s fundamental for taxpayers to ensure they remain compliant by engaging tax professionals to handle their books of accounts and tax returns. For more information, you can engage us for professional advice.