CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

All over the world, governments funds huge public expenditure on behalf of their

citizens for the provision of basic amenities and other social services. Government

is therefore saddled with the responsibilities of providing basic amenities and other

social services for her citizenry (Olaoye & Ekundayo, 2018). Hence, it is obligatory

that governments source for funds from various sources to meet their obligations, to

meet up with these responsibilities, governments require substantial amount of

funding. Among the various sources from which governments can generate income

is taxes, and taxes are the most important and most reliable; contributing much

more than any other source (Onuoha & Dada, 2016).

Tax, in the words of Agbetunde (2010 cited in Olowookere & Fasina, 2013) is a

compulsory levy which a government imposes on its citizens to enable it to obtain

the needed revenue to finance its expenditure; generally, taxes are considered a

civic duty. The original concept of tax was basically to raise money to meet the

expenditure of government. However, tax is much more than collecting revenue, it

is more about building accountable and transparent relations between government

and its citizens. To Madjid (2015), taxpayers consider tax as a cost, be it an

individual or corporate body. This induces in the taxpayer a natural instinct and

desire to minimize this cost and thus maximize his income and profit. Conflicts

therefore arise between government objectives to maximize tax revenue and that of

the taxpayer to minimize tax incidence, which necessitates tax avoidance, evasion

as well as low level of tax compliances among tax payers.

Tax compliance can be described as the process of fulfilling the tax payer’s civil

obligation for tax payment and filing of tax returns including the provision of

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necessary documents and explanations required by the tax authority in a timely

manner, tax compliance may be voluntary or involuntary (Ofiafoh, Ilaboya &

Francis, 2016). Low level or non-compliance of taxpayers is one of the greatest

problems facing the Nigerian tax system. Tax compliance is a major problem for

many tax authorities and it is not an easy task to persuade taxpayers to comply with

tax requirement even though ‘tax laws are not always precise’ (Umar & Oyedokun,

2018). Aksnes (2011) discussed some reasons why taxpayers may be non-

compliant and these include flexible tax morale; low education; rules that are too

complicated to follow; taxable activities that are manipulated to avoid tax; a

perception that the risk of being caught is low; aversion towards the public sector;

and a culture of corruption.

Tax compliance is a major problem for many tax authorities, especially in Nigeria

Mohammed, Derashid, and Ibrahim (2016). Taxpayers will always look for means

of reducing their tax liability either through tax evasion or tax avoidance. This may

give rise to incorrect filling of their tax returns and loss of revenue to the

government (Mohammed, Derashid, & Ibrahim 2016). An unduly complex

regulatory system and tax regime enforcement makes tax compliance unduly

burdensome and often have a distortional effect on the development of small and

medium scale enterprises (SMEs) as they are tempted to change into forms that

offer a lower tax burden or no tax burden at all (Masato, 2009). Tax compliance is

the process whereby taxpayers comply with the stipulated laws and regulation by

remitting the expected tax return accurately and truthfully. Low tax compliance and

remittance limit the capacity of government to raise revenue for developmental

purposes because the higher the revenue, the more likely government will put in

place developmental plans for the enhancement of the living standard of the people

(Mohd, Mohamad & Mohd, 2013).

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Oyelade (2016), perceived low tax compliance in Nigeria as unpleasant; this is

rampart because of ineffective administration encouraged by overreliance on crude

oil revenue which resulted to neglect of taxation. Olokooba, Awodun, Akintoye &

Adebowale, (2018) averred that continuous violation of tax laws and persistent rise

in low tax compliance has necessitated government at all levels to revisit

enforcement strategies for effective tax administration towards improving tax

revenue. Abel (2017) affirmed that tax evasion has remained subject of discussion

in the Nigerian tax system for a very long period of time possibly because it is one

of the major problems confronting effective tax administration in Nigeria. To

effectively tackle problems of poor tax administration, government that had

recorded remarkable improvement like Lagos State and few other had since

employed some tools among which is tax audit.

Daniel, Akowe and Awaje (2016), defined tax audit as an examination of an

individual or organizations tax report by the relevant tax authorities in order to

ascertain compliance with applicable tax laws and regulations of state”. He further

said that Tax audit is a process where the Internal Revenue Service tries to confirm

the numbers that you have put on your tax return. On the other hand tax compliance

can be define as an ability of a tax liable body to submit accurate, complete and

satisfactory returns in conformity with tax laws and regulation of the state to the

authority for the purpose of tax assessment.

Modugu and Anyaduba (2014) noted that a tax audit is an examination of whether a

taxpayer has properly assessed and reported their tax liabilities and meet other

requirements. Meaning that tax audit conducts an investigation on the compliance

of any forms of taxes either direct or indirect concerning their audited financial

statements and other tax-related returns. However, non-compliance in tax systems

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 remains an obstacle to tax administration, revenue generation and particularly to

the government to meet developmental projects.

Hence, tax audit is considered an instrument of government in the quest to generate

tax revenue. Olaoye and Ekundayo (2019) noted that the role of an audit program

in a modern tax administration must extend beyond merely verifying taxpayers

reported obligations and detection of discrepancies between a taxpayer’s

declaration and supporting documentation. Tax audit may increase tax revenue in

two ways: directly through assessment of additional taxes, and indirectly by

improving taxpayer compliance with the tax laws and regulations.

1.2 Statement of the Problem

One of the more vexing problems for policy makers in developing and transition

economies is encouraging high levels of tax compliance. This issue is independent

of the overall tax “take” from GDP. Even if one begins from a position that

government should be small, high tax compliance is necessary for efficiency and

equity as well as for the development of social capital (Slemrod, 1992). However,

when it comes to the obligations imposed on them by law, taxpayers are not always

compliant. Low tax compliance is a matter of serious concern in many developing

countries. This is because it limits the capacity of government to raise revenue for

developmental purposes. This implies that the higher the revenue, the more likely

government will put in place developmental plans for the enhancement of the living

standard of the people. However, tax audit has been proven for better tax

compliance.

Compliance to tax laws typically means the true reporting of the taxable income,

appropriate computation of the tax payable, filling of the returns and timely

payment of tax liability. If tax payers feel that their interests are served by the

government, their willingness to pay tax may grow. In developing countries such as

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 Nigeria characterized by government insensitivity to the plight and aspirations of

the citizens, fiscal recklessness, corruption, low standard of living and

infrastructural decay, the willingness to pay tax is at the lowest ebb. Akintoye and

Tashie (2013) examine the effect of tax compliance on economic growth and

development in Nigeria while Abata (2014) focuses on the effect of tax revenue on

economic growth. However, these studies do not state the impact of tax audit on tax

compliance, which is the main focus of this work. The reason for the choice of this

data is that this is the record that shows the companies that filed in their returns and

the companies that eventually paid tax with corresponding revenue generated for

each period. The study objectives are to investigate the focuses on the impact of tax

audit on tax compliance in Lagos state.

1.3 Objective of Study

The main objective of this study is to examine impact of tax audit on tax

compliance in Lagos State. The study therefore will specifically:

(i) evaluate the relationship between tax penalty and tax avoidance in Lagos

state.

(ii) examine the relationship between tax enforcement and tax awareness in

Lagos state.

(iii) determine the relationship between routine tax examination on tax evasion

in Lagos state.

1.4 Research Questions

This research work will employ the following research questions:

(i) What is the relationship between tax penalty and tax avoidance in Lagos

state?

(ii) What is the relationship between tax enforcement and tax awareness in

Lagos state?

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 (iii) Is there any relationship between routine tax examination and tax evasion in

Lagos state?

1.5 Research Hypotheses

For the purpose of this research work the following hypotheses have been

formulated:

Hypothesis One

Ho: There is no significant relationship between tax penalty and tax avoidance in

Lagos state.

Hi: There is significant relationship between tax penalty and tax avoidance in

Lagos state.

Hypothesis Two

Ho: There is no significant relationship between tax enforcement and tax

awareness in Lagos state

Hi: There is significant relationship between tax enforcement and tax awareness

in Lagos state.

Hypothesis Three

Ho: There is no significant relationship between routine tax examination and tax

evasion in Lagos state.

Hi: There is significant relationship between routine tax examination and tax

evasion in Lagos state.

1.6 Significance of the Study

This study will provide an understanding of the concept of tax audit and its

influence on compliance in Lagos state, thus enabling policy makers and

government to formulate policies harness strategies that would improve compliance

level of tax payers in the state and in the nation at large, which would help curb tax

evasion and increase government revenue generation.

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 The study will also provide more information to the body of knowledge by
encouraging more research in the field of tax audit and compliance. Furthermore, it
will create awareness for the enforcing institutions on the benefits of having a
proper tax audit practice, thus steering up high level of tax compliance. Above all,
this study helps policy and legislative makers to view tax audit as an important
aspect of rearing up tax compliance and the appropriate sanctions and penalties.

1.7 Scope and Limitation of the Study

The study is restricted to Lagos state Internal Revenue Service (LIRS), the study

however, examined the impact of tax audit on tax compliance in Lagos state. It is

imperative to note that the research findings will only reveal the view of the
organization under study. Therefore, it cannot be assumed to be generally
applicable to all organizations. Time factor can be considered as the main
limitation to the study. The findings of this study will be solely based on the
information provided by the respondents and the information gotten from the
secondary source of data.

1.8 Definition of Terms

Tax audit: is an examination of an organization's or individual's tax return to verify
that financial information is being reported correctly.
Tax compliance: refers to fulfilling all tax obligations as specified by the law
freely and completely.
Tax enforcement: as the act of making sure that people obey tax laws through
compliance.
Tax avoidance: refers to the use of legal methods to modify an individual's
financial situation to lower the amount of income tax owed
Tax evasion:  is an illegal activity in which a person or entity deliberately avoids
paying a true tax liability.

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