In recent years, we have seen a marked rise in the frequency, complexity, and scope of tax audits, assessments, and disputes. This trend has affected virtually every aspect of taxation, encompassing both direct taxes (both domestic and international) and indirect taxes (such as Value Added Tax (VAT) and Customs duties), along with specialized sectors like tax fraud and evasion.
Therefore, this article explores the nature of tax audits, what prompts them, the rights of taxpayers during an audit and strategies for managing audits conducted by the Kenya Revenue Authority (KRA).
What are KRA Audits?
In Kenya, the KRA operates under legislative authority with the primary role of collecting revenue on behalf of the Kenyan government. To improve revenue collection, KRA conducts audits aimed at taxpayers in accordance with the Tax Procedures Act, 2015 (TPA).
A KRA audit primarily serves as a verification mechanism to ensure taxpayer compliance. It aims to compare and verify the information provided by taxpayers in their self-assessments against their actual documentation, identifying any discrepancies.
Today’s audits go beyond merely uncovering undeclared revenue. They may result in penalties, interest charges, and even criminal charges for taxpayers, in addition to damaging their reputation and standing in the business community. With Kenya’s tax system evolving to accommodate new business models, KRA has increased the frequency of its audits and investigations to guarantee that every taxpayer contributes their fair share.
Factors Leading to a KRA Audit
Several factors can prompt a Kenya Revenue Authority (KRA) Audit, varying with the specific industry or business of the taxpayer. However, some common triggers for KRA Audits apply universally, including:
These triggers highlight the broad spectrum of activities and situations that can attract scrutiny from the KRA, underlining the importance of compliance and accurate reporting for taxpayers.
Audit Duration and Document Retention
According to the KRA, assessments following an audit must adhere to specific time constraints. As per Section 29 of the TPA, the KRA is restricted from issuing a default assessment more than five years after the close of the reportable period. Similarly, under Section 31 of the TPA, an additional assessment cannot be issued beyond five years after the taxpayer has filed their self-assessment return. However, these five-year limits do not apply in instances of serious or deliberate neglect, evasion, or fraud by the taxpayer. In such cases, the KRA must demonstrate the presence of fraud, evasion, or significant neglect to justify an audit beyond the standard five-year timeframe. Taxpayers are entitled to question any audit attempts that exceed this period.
Additionally, taxpayers are required by Section 23 of the TPA to keep all necessary documents for a span of five years following the end of the reporting period they pertain to, unless a tax law specifies a shorter duration.
The Audit Procedure
The audit procedure is a structured process rooted in tax law and standard practice protocols. The audit procedure is as follows:
Issuance of Notice of Intention to Audit: The process initiates when the KRA, upon identifying one or more audit triggers, sends the taxpayer a Notice of Intention to Audit. This notice details the specific tax areas under scrutiny (e.g., VAT, Withholding Tax, Corporation Tax, PAYE, Rental Income Tax, Customs Taxes, etc.), the planned start date, and the location of the audit, which is typically at the taxpayer’s premises. It also requests the provision of all relevant information and documentation for the audit.
- Engagement of Tax Advisors: At this juncture, it is prudent for taxpayers to hire tax advisors. These professionals can help scrutinize the taxpayer’s records and ensure that all necessary documents are presented to the KRA.
- Notification to KRA: Taxpayers must inform the KRA if they engage external tax advisors to ensure that all audit communications are directed through or copied to them.
Failure to present all requested documents could lead to further assessments. If certain documents are unavailable, the taxpayer must promptly inform the KRA and explain the absence. It’s a legal offense not to maintain required records without a valid excuse, as per Section 93 of the TPA. Should a taxpayer refuse to provide specific documents, the KRA may obtain a search and seizure warrant. This warrant grants the KRA the authority to access the taxpayer’s premises, property, documents, and data storage devices related to the warrant.
Audit Outcome and Next Steps
Following the audit, the KRA provides the taxpayer with an initial audit report. This report outlines the audit’s findings and the anticipated tax liability. The taxpayer may be requested to submit further information or documents to address any issues identified during the audit.
There is a possibility for either the KRA or the taxpayer to request a meeting after the preliminary audit report is received. The aim of such meetings is to delve deeper into the taxpayer’s business operations, providing a platform for clarification and insight. It is advisable for the taxpayer to have their tax advisor present during these discussions for guidance and record-keeping. This phase is crucial as it allows for the resolution of any misunderstandings directly with the KRA and is often seen as a preliminary step towards dispute resolution, enabling the taxpayer to settle straightforward matters.
In our next articles, we look at what happens after the tax audit and explore the dispute resolution process. You can read more about these on the below links:
Tax Audits and Dispute Resolution – The Kenya Series 2: After the tax audit – Assessments and Objections
Tax Audits and Dispute Resolution – The Kenya Series 3: Appeals to the Tax Appeals Tribunal, Courts and ADR
You may also read – What to do when you receive an Email or Notice From the Kenya Revenue Authority
W&T Advocates LLP are here to assist
Our team at W&T Advocates LLP is experienced in all stages of the tax audit and dispute process. Our approach is designed to help people and organizations address tax audits and disputes through effective strategies for their mitigation, management and prompt resolution.
We can help you to implement consistent and defensible dispute resolution practices and policies as indicated below:
- Responding to letters and notices from the KRA including Requests for Information, Demand Letters and Assessments
- Assisting in resolving any potential dispute during the audit phase
- Drafting objection letters and applications to the KRA
- Drafting appeals to the Tax Appeals Tribunal
- Representation of the appeal at the Tax Appeals Tribunal, High Court and Courts of Appeal. This involves attending mentions and hearing at the Tribunal and Courts to ensure our client’s needs are adequately represented; and
- Engaging in alternative tax dispute resolution mechanisms where appropriate.
Editor’s note: Should you have any questions about this legal alert, please do not hesitate to contact:
Andrew Waithumbi Partner W&T Advocates LLP waithumbi@wtadvocates.com
Timothy Thambu Partner W&T Advocates LLP thambu@wtadvocates.com
