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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
In recent times, there has been the urge for tax authorities in Nigeria to carry out spontaneous and sporadic tax audits and investigations on taxpayers, especially corporate bodies, suspected of tax evasion or tax delinquency. In doing so, the tax authorities, in discharge of their duties as contained in the enabling tax laws, adopt various methods in tackling taxpayers. The taxpayers, on the other hand, are quick to resist any additional tax burden that might drain their pockets. While tax authorities do have statutory powers to conduct tax audits and investigations on taxpayers to ensure that the revenues due to government are not lost by way of false returns, these powers are, however, not without legal limits. Tax audits and investigations are very complex and tasking processes and as such, tax managers and their consultants must understand the rules of the game. A tax audit is an examination of whether a taxpayer has correctly assessed and reported their tax liability and fulfilled other obligations. Tax audits are often more detailed and extensive than other types of examination, such as general desk checks, compliance visits/ reviews or document matching programmes.
Tax Audit and Investigation has been known since the biblical era. Yet, many are never comfortable discussing taxation, worse still Tax Audit and Investigation. To deter evasion and maximize compliance with tax laws is key in government’s Revenue Policy. One of the aims of Tax Audit and investigation is to drive the taxpayer to comply with the outcome of tax audit investigation and also to make him become compliant with the provisions of tax laws in future. That is why the terms have become synonymous with the efforts of government to generate Revenue. Taxation has evolved through many stages over the years, and has assumed many different forms. In ancient Egypt, scribes collected taxes. During one period the scribes imposed a tax on cooking oil. To ensure that citizens were not avoiding the cooking oil tax, the scribes would audit households to ensure that appropriate amounts of cooking oil were consumed and that citizens were not using leavings generated by other cooking processes as a substitute for the taxed oil.
The taxpayer is a dodger when it comes to the issues of tax payment. He therefore needs to be motivated seductively or by force into paying what is expected from him. The taxpayer is always unwilling to pay his tax liability. The use of tax audit has however helped in the generation of revenue to the government. Adediran, Alade & Oshode (2013), opined that, tax audit just like financial audit involves the gathering of information and processing it for determining the level of compliance of an organization with tax laws of the territory. For a successful audit, it is necessary that the auditor organizes his work in such a way that the assignment is accomplished completely and efficiently. Moreover, the primary goal of a revenue body’s compliance activity is to improve overall compliance with their tax laws, and in the process instill confidence in the community that the tax system or policy and its administration are fair. Instances of failure to comply with the relevant tax laws are inevitable whether due to taxpayers’ ignorance, carelessness, recklessness and deliberate evasion, or weaknesses in administration. To the extent that such failures occur, governments, and in turn the communities they represent, are denied the tax revenues they need to provide services to citizens. According to OECD (2006), a tax audit is an examination of whether a taxpayer has correctly assessed and reported their tax liability and fulfilled other obligations. Prior to 1998, tax payers in Nigeria (persons and corporations) were assessed to tax by the relevant tax authorities; a system otherwise known as government assessment. With the introduction of self-assessment scheme into the Nigerian tax system in 1998, tax payers are now required to file in their tax returns independently. This practice informed the need for tax audit, to ensure tax payers file in accurate information regarding their income and expenses. Tax payers are inherently disposed to reducing their tax liability either through tax evasion or tax avoidance. The Audit unit of the Federal Inland revenue Service (FIRS) employed audit tools to identify tax evaders and to officially carry-out enforcement on any company. One of such audit tools is the risk engine tool for identification of tax evaders or non-compliant taxpayers. Companies flagged by such tools are either subject to tax audit or tax investigation. In line with its statutory mandate and the provisions of Sections 58 and 60 of the Companies’ Income Tax Act (Cap. 21 LFN 2004) and Sections 26 and 27 of the Federal Inland Revenue Service (Establishment) Act 2007 (Iheanyi, 2014).
1.2. STATEMENT OF PROBLEMS
Historically, most taxpayer-driven failures or compliance risks have been addressed nearly exclusively in terms of regulatory enforcement through an audit-based approach. In more recent times, tax revenue administrators have come to realize that the factors underlying taxpayers’ compliance behaviour in any specific risk area are varied and often complex, and are unlikely to be treated successfully with a ‘single action’ strategy, particularly one based exclusively on regulatory enforcement action such as audits and investigations. Though, the principal source of a government’s revenue should be taxation. This is not the case in Nigeria. The country relies heavily on crude oil revenue and foreign loans and aid for a significant fraction of revenue for governance. This is largely due to poor tax administration capacity and collection ability in the country. In the first place, while tax policy and tax laws create the potential for raising tax revenues, the actual amount of taxes flowing into the government coffers, to a large extent, depends on the efficiency and effectiveness of the revenue administration. Weaknesses in revenue administration lead to inadequate tax collections. Borrowing to finance the resulting budget deficit could cause an unsustainable increase in public debt and inflation.
Furthermore, there is a high incidence of corruption within the taxes and customs administrations. The government suffers major revenue leakages as dishonest revenue officials allow unjustified tax breaks to willing tax evaders. Also, honest taxpayers suffer as corruption in revenue administration leads to harassment, inflated assessment, high litigation cost and leniency towards non-compliant competitors. This high cost of corruption to the government and private sector respectively, is a major setback for the process of tax administration in a country. Any serious effort to reduce corruption in a country and improve governance, in all likelihood, has to involve reform of the revenue administration. Finally, with globalization, goods and services are produced by taxable entities in multiple countries. This presents vast opportunities for manipulating transactions to reduce the tax burden. Without a matching increase in the professional and technological capacity of the revenue administration, the existence of corruption, tax havens and increasing use electronic financial transactions will continue to pose major challenges in enforcing the tax laws. This will further reduce the chances of monitoring taxable activity and countering tax evasion. For this reason tax audit plays an important role to increase the capacity of revenue administration.
In the last couple of years tax audit and investigation has been a critical issue often discussed in Nigeria. The tax authority has had lots of sleepless nights, trying to review the books of the tax payers with the sole aim of increasing the revenue of the government. The question is to what extent has tax investigation and audit contribute to the revenue generation in Nigeria? It is against this backdrop that we define tax audit as a process in which the tax authority examines certain issues relating to the profits of a company and its other related returns, as it may deem necessary and expedient in accordance with the relevant provisions of the Act. It is usually a routine exercise, although its outcome could lead to a re-assessment or referral for special investigation, especially if tax evasion is suspected.
1.3. OBJECTIVES OF THE STUDY
The main objective of this study is to assess the effects of tax audit and investigation on revenue generation in Federal Inland Revenue Service (Nigeria). This study aims at achieving the following specific objectives:
1. To investigate if there is any significant relationship between revenue base of the government and tax audit and investigation in Nigeria.
2. To investigate, if tax audit and investigation can aid in resolving the problem of tax evasion in Nigeria.
3. Identify specific methods FIRS uses to audit taxpayers.
4. Determine the effect of Computer Aided Audit Tools ( CAAT) on Revenue generation in FIRS. 5. Ascertain the extent to which tax payers may have complied with the relevant statutory provisions of the tax law.
1.4. RESEARCH QUESTIONS 
The following questions were asked to guide the research study:
1. Are there any significant relationship between revenue base of the government and tax audit and investigation in Nigeria? 2. To what extent can tax audit and investigation aid resolving of the problem of tax evasion in Nigeria?
3. What are the specific methods FIRS uses to audit and investigate taxpayers.
4. What are the effects of Computer Aided Audit Tools (CAAT) on Revenue generation in FIRS?
5. Are there any extents to which tax payers may have complied with the relevant statutory provisions of the tax law?
1.5. HYPOTHESIS FORMULATION
To enable the researcher test if there is any effect of tax audit and investigation on revenue generation by FIRS; some statistical model will be used based on the responses from oral interview carried out and the questionnaires distributed and also statistical data generated from the appropriate sources. The data generated from all these will be used to test the following hypothetical statements. In order to guide the study the following hypotheses were formulated:
Hypothesis 1:
HO: Tax audit and investigation does not have significant effect on revenue generation in Federal Inland Revenue Service.

Hypothesis 2:
Ho: There is no significant relationship between the increase in the revenue base of the government and tax audit and investigations in Nigeria.
Hypothesis 3
Ho: There is no significant relationship between probability of being audited and tax compliance by taxpayers.
1.6. SIGNIFICANCE OF THE STUDY
One of the most frequently discussed issues in Nigeria is how to solve the economic hardship in the country and how to create an industrial base that can guarantee self sustaining economic development. Also one wonders why a country which is richly endowed with the necessary human and material resources and which the people pay tax has been turned a heavily indebted country. The study will afford us the opportunity to the concept and theory of tax audit/investigation and it roles on revenue mobilization, and the various means by which government has been using tax to generated revenue, and the important role of taxation in drawing the development agenda and planning the economy of the country. The study will analyze the tax reform, policy and administration framework, as well as the significance and application of the tax audit and investigation. This would enable the various stakeholders of the tax administration and enforcement, namely the FIBR, SBIR, taxpayers and the government to get a better understanding of the role of the tax audit and investigation, and to contribute to its successful implementation/adoption. The study will also put forward relevant recommendations on improvements that could be made on the current practice of tax audit and investigation. The study will also provide an assessment of the transparency and integrity in carrying out the tax audit process in its current state. It will provide a clear picture of the level of efficiency and effectiveness of the existing tax audit/investigation practice in the Federal Inland Revenue Service in the Lagos Metropolis. The findings may also serve as a good reference source for further research into the tax audit. It will also be useful to the member of the Chartered Institute of Taxation of Nigeria (CITN) who may wish to use it for future research and to the student, and researchers for further research study on the theory of tax audit and investigation.
1.7. SCOPE OF THE STUDY
The scope of this study covers critical examinations on the effect of tax audit and investigation on revenue generation in Nigeria. It will also analyze other related issues such as structure and administrative machinery of tax mobilization in Nigeria and their associated problems. It shall also covers the issue of non-compliance by potential taxpayer which directly result in tax evasion or avoidance. The essence of this digression is to possibly find out the obstacles if any, that hinder the effective collection and administration of tax in the country. This study analyzes the tax audit practice in the Lagos Metropolis in respect of the Nigeria Federal Inland Revenue Service, also cross section of some potential tax payers were considered in the study. This study also considers the practice and its application in the SIBR of the FIRS, thus the scope may be somehow limited. The Lagos State Region is a very geographical representative of the large population of Nigeria. Its inhabitants represent a large percent of the economic, business and financial activities in the country. It is therefore supposed that this study illustrates the tax audit and investigation practice and its general effect in improving revenue collection in the country.
1.8. LIMITATION OF THE STUDY
Firstly, even though the study is intended to capture all the tax administration procedures, available data on tax auditing exists only for the operations ran by the Lagos Internal Revenue Service therefore information gathered for this study came mostly from the LIRS, which is just one unit of the countries revenue authority. However, it is believed that the outcomes and conclusions are relevant to the work of the FIRS. 
Additionally, most tax payers were unwilling to provide information about the study since most believed that the result of a tax audit and investigation on their books and tax payment was confidential and therefore were not very willing to provide all or the relevant information needed for the project. Finally, some respondents were not keeping proper records of their business activities and therefore could not give adequate and correct information on the effect of taxation on their business activities and the rippling effect of tax audit and investigation on the economy of Nigeria.
1.9. DEFINITION OF TERMS
1. Tax: A compulsory levy by the government on its citizens for the provision of public goods and services.
2. CITA: (Company Income Tax Act) it is a Federal Law operated by the FIRS, which deals with the taxation of all limited liability companies in Nigeria with the exception of those engaged in petroleum operations.
3. Persons/tax payers: It includes all taxable persons be it individual or corporate bodies.
4. Tax Audit: According to OECD (2006), a tax audit is an examination of whether a taxpayer has correctly assessed and reported their tax liability and fulfilled other obligations. Adesina (2005) defined an Audit as the examination of accounting documents and of supporting evidence for the purpose of reaching an opinion concerning their propriety.
5.Tax Reform: Tax reform is the process of changing the way taxes are collected or managed by the government and is usually undertaken to improve tax administration or to provide economic or social benefits.
6. Tax Evasion: Tax evasion is a deliberate and willful practice of not disclosing full taxable income so as to pay less tax.
7. Tax Avoidance: Tax avoidance has been defined as the arrangement of tax payers’ affairs using the tax shelters in the tax law, and avoiding tax traps in the tax laws, so as to pay less tax than he or she would otherwise pay
8. Non-Compliance: can be defined as the failure on the part of a taxpayer to correctly file returns, report actual income, claim the correct deductions, reliefs and rebates and remit the actual amount of tax payable to the authority on time.
9. Desk (or Office) Audit This is one which the whole activity of the audit takes place within the confines of the office of the tax officials
10. Field Audit By the nature and scope of their work, regular assessing officers can only carry out limited desk audit through examination of accounts and returns.

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