Demystifying Tax Audit: The Process, Challenges and Techniques
Tax audits are a common experience for most businesses in Ghana and can be a source of constraint and anxiety for businesses. Nevertheless, it is a critical aspect of tax compliance and administration for the Revenue Authority in Ghana. It is an examination, administrated by the Ghana Revenue Authority (GRA), of a taxpayer’s returns and records with the view of identifying whether there is any revenue gap. The significance of tax audits in Ghana cannot be overstated, as it plays a vital role in ensuring that the country’s tax system is fair, transparent, and effective. It is crucial for taxpayers to understand the process and to be prepared for a tax audit.
There are various methods through which a tax audit could be conducted by the Revenue Authority and this usually depends on the purpose of the tax audit. The methods that are mostly adopted include a comprehensive audit, special audit, and desk audit.
A Comprehensive audit entails a review of the entity’s financial statements (including the underlying document used in the preparation of the financials), tax filings, and payments. Furthermore, the method entails the audit being conducted at the client’s premises and is usually time-consuming and involves a lot of resources.
A Special audit is where the GRA usually concentrates on a selected tax type and conducts a thorough review of that tax type.
A Desk audit is conducted at the GRA’s premise based on the returns filed and supporting documents provided by the taxpayer at the GRA’s request. Unlike the comprehensive audit, desk audits are not detailed but a conduit that could lead to comprehensive audit.
In view of the above, the purpose of the article is to address the various challenges that can arise during a tax audit with the GRA and to provide practical techniques for dealing with these obstacles. It is also to help taxpayers understand the tax audit process and to provide them with strategies for successfully navigating this often complex and challenging experience.
Legal basis for conducting a tax audit
Section 36 of the Revenue Administration Act, 2016 (Act 915) is the legal basis that grants the GRA the avenue to audit a taxpayer. This section gives the Commissioner General of the GRA the power to conduct audits and inquiries into a taxpayer’s affairs to determine their tax liability.
Furthermore, section 27 of Act 915 requires taxpayers to maintain documents such as receipts, invoices, vouchers, and contracts among others. This grants the GRA the right to have access to information and assets of the taxpayers as expressed in section 33 of Act 915 for an audit, amongst other related matters, to be conducted.
For the purpose of a tax audit, the GRA relies on some of the under-listed triggers below to select a taxpayer:
- Random selection from annual sampling of file
- Refund claims by a taxpayer
- History of non-compliance
- Request from taxpayer
- Notification of cessation of business
- Referrals resulting from desk examination
The Tax Audit Process
Taxpayer Notification
Before conducting a comprehensive or special tax audit, the GRA is required to notify the taxpayer through writing of the intention to audit the entity. The letter which is known as the introductory letter should state the following.
- Proposed period of the audit
- Tax types to be audited
- Names of auditors to conduct the audit
- Proposed start date of the audit
- Documents required for the audit
The letter should also be accompanied by a document stating the Rights of the Taxpayer during the audit process.
Introductory Meeting
After the taxpayer has been notified of the proposed tax audit, both parties need to agree on a date for an initial meeting to propel the start of the audit. During this meeting, the GRA normally inquires about the entity’s operations and any other relevant information that would aid the GRA in gaining considerable knowledge about the entity and any peculiarities that pertain to the entity within the industry it operates. Other issues discussed during this meeting include GRA’s information request, mode of information sharing, start date of the audit, and audit planning processes, among others.
Information sharing and gathering
During this stage, the taxpayer is required to provide all information requested by the GRA for their review and analysis. The information can be shared via electronic medium or hardcopies depending on the agreement with the GRA. This stage also includes the taxpayer and its personnel being interviewed by the GRA officials.
Issuance of draft findings and making of proposed adjustments
The GRA, after their review of the information and documents provided to them, will share their analysis of the audit with the taxpayer. This analysis is a summary of their findings and assessed tax exposures and potential liabilities or credit. Taxpayers are required to thoroughly analyze the proposed adjustments for accuracy and engage the GRA further to resolve any issues that were not accurately reported or addressed in the report. It is worth noting that, within this period there would be reconciliation meetings between the GRA and the taxpayer to ensure all issues are resolved.
Exit meeting
After the proposed adjustments have been finalized by the taxpayer and the GRA, an exit meeting needs to be held by both parties to conclude on the audit issues raised. This meeting is very crucial when concluding the audit and hence it is important to document the discussions during this meeting for future reference purposes.
Final report
At this stage, the GRA concludes the audit report and shares same with the taxpayer. Where the taxpayer is dissatisfied with the audit report, the taxpayer is required to respond in writing, providing the basis for objecting to the report together with supporting documentation, within 30 days of receipt of the letter as indicated in section 42 of the Revenue Administration Act, 2016.
Failure to do so implies that the taxpayer has accepted the audit report and is willing to settle any liability thereon. The taxpayer is also allowed to request for an extension of time to object to the report, however, this should be done in writing and must be done before the expiry of the 30-day period.
Objection to tax decisions
As part of ensuring a fair hearing for taxpayers during an objection process, the government has set up an ITAB (Independent Tax Appeals Board). This eleven-member board was set up to provide a fair hearing to taxpayers during the objection process.
Before a taxpayer’s case can be heard by the board, it is crucial to note that, in the case of issues related to import duties and taxes, the taxpayer must have paid all outstanding taxes, including the full amount in dispute. In the case of other tax types, they should have settled all outstanding taxes, including thirty percent of the tax in dispute. If taxpayers are dissatisfied with the ITAB’s decision, they have the option to pursue the case in court for another hearing.
Challenges and techniques for overcoming tax audit obstacles
During tax audits, a few challenges could be faced which may lead to the audit process taking longer than expected or the GRA overly assessing the taxpayer to liabilities, among others. Below are some of the challenges and proposed techniques for tackling them.
- Improper documentation and inadequate record keeping
Proper record keeping is very essential to the audit process as the GRA relies on available documentation to perform their analysis. Not providing the needed information may lead to the GRA assessing the entity to liabilities that could have been averted should the required information be available. In cases of inadequate documentation the GRA will assess the taxpayer based on the information available to the best of their knowledge taking into consideration provisions of the tax law.
It is also advisable to document the discussions and arguments that ensue during the information-sharing stage of the audit as it may play a key role when the GRA shares its assessment of the entity. The documentation can be done through emails or in the form of minutes.
Taxpayers are encouraged to keep a proper record system that is easily assessable and available in case of a tax audit. The information should also be clear and understandable to avoid misinterpretations by the GRA.
- Lack of understanding of the taxpayer’s nature of business and industry
In Ghana, certain businesses operate in specialized industries and hence have unique business models and operations. Some GRA personnel may not understand fully the peculiarities pertaining to such businesses and the tax implications of the model of their business operations. Taxpayers are encouraged to be actively involved during the audit process and provide the needed clarity and explanations the GRA requires about the business operations to be able to make informed decisions.
- Communication
The entire audit process requires constant communication with the GRA team conducting the audit. Taxpayers are advised to keep records of all correspondence with the GRA during the audit and to constantly engage the GRA on issues the GRA raises during the process to ensure they are all properly addressed. It is also crucial for the taxpayer to provide the needed explanations to the GRA to mitigate the incidence of the GRA assessing the taxpayer to avoidable liabilities which may be because of information flow and lack of effective communication.
- Lack of understanding of tax laws
Due to the complex nature of some tax laws and their requirements, some taxpayers are unable to adhere to and apply the tax laws accurately in their operations and this can lead to the GRA imputing penalties and interests for non-compliance with the tax laws. It is advisable for taxpayers to engage and seek the advice and services of tax consultants who have in-depth knowledge in dealing with tax-related issues.
Conclusion
In conclusion, tax audits, while often a source of stress and anxiety for businesses in Ghana, are a fundamental and indispensable component of the nation’s tax system. While tax audits can be burdensome, they are a critical part of maintaining a just and transparent tax system in Ghana. Challenges in the tax audit process are inevitable, but they can be effectively managed. To overcome these challenges, taxpayers are encouraged to adopt best practices such as maintaining meticulous and accessible records, actively engaging with the GRA throughout the audit, and seeking expert advice from tax consultants when necessary.
