Post-Audit Actions – How to Protect Your Business After a KRA Audit. The KRA tax audit process is stressful and nerve-wracking for businesses. It’s intrusive, time-consuming, and rigorous for all parties. That’s why most business owners breathe a sigh of relief when KRA completes an audit. But it’s not the end, is it?
You still need to wait for the KRA audit report and the tax assessment to see what’s in store for you as a taxpayer. Will there be additional taxes? Penalties? Criminal investigation? All these are possible outcomes. So what post-audit actions should a business take to stay afloat? This article provides a practical framework on how to protect your business after a KRA audit.
How to Protect Your Business After a KRA Audit
As a business owner, your post-audit actions should be about risk containment and future-proofing your business against compliance issues. Here are practical tips to protect your business after a KRA audit:
Confirm the Audit is Concluded
Just because KRA has stopped coming to your premises or enquiring about audit documents doesn’t mean that they’ve completed the audit. Ensure the audit is concluded by obtaining the final audit report or Notice of Assessment from KRA. An audit that hasn’t been officially closed means your business is exposed to future assessments for the same tax period.
Carefully Review the Audit Report
Think of a KRA audit as the mandatory tax health check your business needs. Just like you carefully study a health report after a diagnostic test at the hospital, you should carefully review what’s up with your business. Some of the areas to focus on include:
- The flagged tax heads, e.g., VAT, PAYE, MRI, Income Tax, Withholding Tax, and Corporate Tax.
- The source of non-compliance. It could be poor documentation, misinterpretation of tax laws, and weak internal controls.
Tip 💡: Engage an experienced tax consultant to help you interpret the audit report. KRA findings can be complex for the regular taxpayer, but an expert can break them down for you and identify systemic risks and your errors.
Correct the Highlighted Errors
Making a mistake is normal. What’s intolerable is repeating the same mistake over and over again, even after someone pointed it out. KRA may waive your penalties for minor mistakes, provided you correct them going forward. That’s how you redeem your business and get it off KRA’s radar. Here’s what to do to rectify errors post-audit:
- Update accounting policies on VAT classification, expenses to be deducted, transfer pricing, etc.
- Update your internal systems, like accounting software and payroll systems.
- Relearn the updated KRA tax laws and interpretation, and align them with tax treatment moving forward.
- Acquire automated, up-to-date, and KRA-compliant eTIMs and other relevant software.
Implement Internal Tax Controls
You don’t want to be ambushed by KRA again for errors and discrepancies that could have been streamlined if an internal control were in place. Once you’ve identified the exposure areas, implement an internal tax control. Such controls include:
- A monthly tax compliance checklist.
- An independent review of tax returns before submission (preferably by a tax expert).
- Segregating internal duties like bookkeeping, tax calculation, and filing.
This is another area that works better when you involve a tax consultant or a tax audit firm. Periodic internal audits and compliance reviews protect your business from costly and disgraceful KRA audits.
Refine Your Record-Keeping and Documentation
Impeccable bookkeeping and documentation go a long way to make your case easy during KRA audits. Make the following enhancements to keep your documents in order:
- Make sure all invoices are Electronic Tax Register (ETR)-compliant.
- Keep clean and well-organized records of all relevant data in your business for at least 7 years.
- Reconcile iTax data with your financial statements.
- Reconcile PAYE with the payroll records.
- Reconcile VAT returns with the sales and purchase ledger.
When your records are clean, you have no reason to worry during future audits.
Don’t Be Afraid To Object to the Tax Assessment
Engaging with KRA in any capacity is intimidating for most businesses. Don’t let fear coerce you into accepting the tax assessment blindly. If you think the assessment is incorrect or unfair, file a notice of objection. Here’s what to do post-audit if the assessment is disputed:
- File a Notice of Objection within 30 days after the tax assessment.
- Argue your case and provide supporting documents.
- Escalate the dispute to the Tax Appeals Tribunal (TAT) or the Alternative Dispute Resolution (ADR) if necessary.
Tip 💡: This is another area where expert guidance is needed. Don’t make final decisions like paying additional taxes, filing an objection, or appealing to the TAT without consulting a tax consultant. They will help you draft a sound and evidence-based objection to avoid weak objections, which increase scrutiny. Tax professionals also offer representation during KRA legal proceedings, such as TAT and ADR hearings.
Manage Cash Flow
Post-audit outcomes like additional tax liabilities and penalties may strain your business’s cash flow. You don’t have to lose your business because of an audit. Instead, engage with KRA to devise a payment plan. Paying in installments lets you continue running your business as usual while still paying your due taxes.
Also, pay the principal tax early to avoid accruing interest. It’s even easier to convince KRA to waive the penalty when the principal amount is settled.
Future-Proof Your Business
Statistically, KRA is likely to audit your business again once audited. They want to ensure that you’ve streamlined your tax affairs and rectified any errors identified during the first audit. You should future-proof your business in readiness for an audit at any time. Here’s how to future-proof your business:
- Schedule and carry out an annual tax health check.
- Train your staff on staying audit-ready and overall tax compliance.
- Stay up to date with tax amendments, Kenyan Finance Acts, and public notices from KRA.
Maintain a Cordial Relationship With KRA
KRA deems a confrontational and emotionally-charged approach as a red flag. This increases the risk and likelihood of enforcement action. The best approach is to maintain a professional and cordial engagement with KRA. Follow these best practices:
- Respond formally and on time.
- Keep all communications documented.
- Consider hiring a professional tax expert to represent you and handle communications on your behalf.
Final Thoughts
While KRA audits look stressful and worrisome, businesses should look at them as diagnostic rather than another compliance hurdle. You discover a lot about your business operations and your financial affairs through audits. That’s why post-audit actions should be about protecting your business and future-proofing it to reduce tax exposure and disruptions. These actions include fixing the highlighted errors, implementing internal controls, and seeking guidance from tax professionals.
