How to Handle a KRA Tax Audit in Kenya
The Kenya Revenue Authority (KRA) uses the self-assessment tax system, where taxpayers are allowed to calculate their taxes and file returns accordingly. The tax authority trusts individuals and businesses to declare their revenue and “give to Caesar what belongs to Caesar.” This is a huge responsibility placed on the taxpayer. It also tests their integrity and trustworthiness. Despite KRA trusting taxpayers to self-assess and pay taxes with integrity, compliance issues still arise. These issues result from the taxpayer’s carelessness, lack of information, and, in some cases, deliberate tax evasion.
\When KRA notices discrepancies between declared revenue and the paid taxes, it initiates an audit. What follows is a Notice of Intention to Audit, or commonly known as a KRA Audit letter. If you’ve received a KRA audit letter, don’t panic. It doesn’t mean you’ve done anything wrong, but how you handle the situation matters. Keep reading to learn what a KRA audit is, what triggers it, and how to handle a KRA tax audit in Kenya.
What is a KRA Audit
In the simplest terms, a KRA audit is a legal process that seeks to verify a taxpayer’s tax compliance. It’s an examination of the taxpayer’s financial records, revenue declarations, filed returns, and other documentation to reconcile the data with the paid taxes. An audit ensures taxpayers are compliant with the country’s tax laws and that taxes are paid in full and on time. A KRA audit examines various supporting documents to verify tax compliance. These include:
- Invoices
- Bank statements
- Payroll records
- Cashbooks
- Financial statements
- Sales and purchases
- Tax returns
- Import and export entries
- Proof of duty payment
- Stock records
- Rent receipts
- Tenancy agreements
- Professional services records. E.g. Consultancy businesses
What Triggers a KRA Audit?
KRA audits vary, depending on the taxpayer and the nature of their business. The most common audits include risk-based, investigative, lifestyle, compliance checks, and refund audits. But what triggers these edits? Various factors can trigger a tax audit from KRA. They include:
- Late filing of tax returns
- Failure to file tax returns, yet you’re a registered taxpayer
- Filing NIL returns constantly
- Publicity on social and mainstream media
- Application to cancel KRA PIN or some tax obligations
- Variance between tax returns and profit margins
- Amending tax returns
- Company restructuring, mergers, acquisitions, etc
- Declaring expenses without an equivalent income
- Persistent loss-making status
- Anonymous tips by unhappy employees or related parties
- Discrepancies between declared tax returns and financial statements
- Data from third parties. E.g., Suppliers’ VAT returns
- Tax refund claims
- Application for tax remissions
- Fluctuation in paid taxes, such as corporate and PAYE taxes
How to Handle a KRA Tax Audit in Kenya
Have you received a Notice of Intention to Audit from KRA? Here’s how to handle a KRA tax audit in Kenya:
- Read the notice carefully: When KRA sends a notice of audit, it includes relevant details such as tax type, tax period, and the required documents. Read the document carefully and note these details.
- Note the deadline: Legal processes are limited by specific timelines and deadlines. Please note the deadline for responding to avoid a direct assessment and penalties.
- Compile all relevant documents: KRA will need to review documents such as financial statements, payroll records, bank statements, and invoices. Gather all these documents in readiness for the audit.
- Maintain transparency and integrity: Most taxpayers panic when they receive an audit notice from KRA. They will try to alter their records or conceal information. This only leads to more disputes. If you notice discrepancies, acknowledge them and propose how to correct them.
- Engage a tax expert: While it’s possible to navigate a KRA audit alone, it’s advisable to work with a tax consultant. They have the required experience and know-how to handle a KRA audit and will advise you on the way forward.
Common Mistakes to Avoid After Receiving a Notice of Intention to Audit
Taxpayers make various mistakes during a KRA audit, which leads to more problems, including penalties, automatic assessment, and interest. We have compiled a list of common mistakes to avoid after receiving a Notice of Intention to Audit to help you navigate the process better. These mistakes include:
- Ignoring the Audit Letter: Some taxpayers ignore KRA audit letters due to ignorance, lack of information, or forgetfulness. This only leads to more issues with the tax authority. Please respond to the letter without delay and seek professional help in case you don’t know where to start.
- Delayed Response: As we mentioned earlier, KRA processes have deadlines. Delays can cause more problems because the tax authority assumes missing deadlines are a sign of ignorance. To avoid missing deadlines, respond to the audit notice immediately.
- Inaccurate Documents: Incomplete, missing, and doctored records raise red flags. If you want your audit process to go smoothly, present accurate and complete records.
- Self-Representation: Unless you’re an accounting and tax expert, KRA auditors may corner you with questions and arguments. Misinterpretation and providing the wrong information can trigger an assessment or weaken your case, in case of an appeal.
- Handling an Audit Incorrectly: KRA audits vary, from the routine 5-year audits to fraud and lifestyle audits. You must understand the nature of your specific audit and handle it appropriately. That’s why you need a tax consultant to help you navigate the audit like a pro.
Get Professional Help to Navigate a KRA Audit in Kenya
Navigating a KRA audit alone as a taxpayer can be overwhelming. You don’t want to misinterpret the tax laws, acknowledge incriminating mistakes, or negotiate a bad deal. A professional tax expert will simplify the whole process for you, handling KRA auditors on your behalf. At Gichuri & Partners, we provide comprehensive tax audit services to taxpayers of all sizes, including individuals, businesses, limited companies, and multinationals.
Our tax audit services include:
- Reviewing the KRA audit notice and identifying the requirements.
- Handling documentation by helping you gather all the required documents, including financial records, invoices, receipts, and bank statements.
- Preparing formal responses to the KRA audit notice, queries, and requests.
- Representing you in all the audit steps, including negotiation of tax payment plans and appeals in case the case escalates.
- Ensuring you get a fair audit and assessment procedure, helping you understand your rights as a taxpayer.
- Handling all communication with the KRA auditors, preventing the audit from broadening to other tax areas.
A KRA audit may cause unrest or anxiety for any taxpayer, whether they are an individual, a business, or a large company. However, working with a tax consultant restores calm, as the expert handles all communication and paperwork with KRA. If you need help with a KRA audit, get in touch with tax experts at Gichuri & Partners.
