KRA disputes disrupt business operations and hurt a taxpayer in unimaginable ways. It begins with panic over sudden tax assessments, then escalates into a full audit and a formal dispute over tax differences. Normal business operations are affected, cash flow is strained, and in some cases, penalties and interests accumulate.
So much hurt from something that can be avoided, right? Yes, KRA disputes are totally avoidable. In fact, very few KRA disputes stem from deliberate tax evasion. Most occur due to system errors, weak documentation, inconsistencies, misunderstanding of tax laws, and KRA’s expectations.
Tax advisory plays a critical role in preventing these KRA disputes. Besides ensuring regulatory compliance, they help you mitigate risks, enhance tax efficiency, and simplify the complex tax laws to help you understand KRA’s expectations. This article examines the role of tax advisory in preventing KRA disputes.
What Triggers KRA Disputes and How to Avoid Them
Before we talk about the role a tax advisor plays in preventing KRA disputes, we need to understand how they come about. Knowing the triggers helps you avoid them, thereby preventing any KRA disputes: These triggers include:
- Incorrect and Inconsistent Tax Filing: The first and obvious trigger for KRA disputes is inconsistent tax returns. The iTax platform is automated, so any discrepancies are easily flagged. It cross-checks data from all your tax records, as well as third-party sources like bank statements and supplier tax data. Any incorrect or inconsistent data triggers a tax assessment. To avoid this, ensure consistency across your financial data and filed returns.
- Incorrect Tax Positions: One of the major causes of disagreements between KRA and taxpayers is incorrect tax positions. These include misclassified income, claiming disallowed expenses, and incorrect VAT application. To avoid this, ensure your tax positions align with the Income Act, VAT Act, and KRA practice notes.
- Poor Documentation: The burden of proof lies with the taxpayer, and KRA doesn’t take a word of mouth. Instead, it requests evidence. If you don’t maintain and organize your documents and records well, you’ll have nothing to support your claims. This lack of evidence escalates KRA disputes. Always keep your supporting documentation in good condition.
- Inadequate Response During Audits: How you respond to KRA during audits or other correspondence affects the trajectory of the dispute. An adequate response will resolve the case quickly, while an unclear explanation will only escalate the matter. Avoid over-disclosure, missed deadlines, and vague explanations.
- Technical Errors and Omissions: Simple errors when filing your taxes can place you under KRA’s radar. These include selecting the wrong tax head, failure to upload some documents, and uploading documents in an illegible format. Another issue is omission, such as undeclared income. To avoid these issues, be vigilant on the iTax system to detect errors before submission.
The Role of Tax Advisory in Preventing KRA Disputes
A tax advisory partner is not valuable when filing your monthly or annual tax returns only. They are a risk management function that helps your business stay in KRA’s good books. Below are the various roles of tax advisory in preventing KRA disputes:
- Identifying Tax Risks Before KRA Does: When you work closely with a tax advisor, they proactively review your tax profile. Through these regular tax health checks, they can spot red flags before KRA does. These include abnormal VAT refund claims, expense ratios that fall outside industry norms, and recurring tax losses. Identifying these risks early helps resolve them before they attract KRA’s attention.
- Help Take Correct and Defensible Tax Positions: As we mentioned earlier, incorrect tax positions are a common source of KRA tax disputes. A lot of grey areas exist around tax positions like withholding tax applicability, VAT claims, refunds, and allowed expenses. A tax consultant helps you take a tax position that is efficient and defensible during a KRA review.
- Improve and Maintain Your Documentation: One of the most critical roles of a tax advisor is ensuring documentation is clear, consistent, and complete. With their experience and interaction with KRA, they understand the documentation standards demanded by KRA. They will guide you on what documents are required, how long you should retain records, and how to reconcile your financial statements with tax filings.
- Aligning Financial Records With Tax Returns: Inconsistencies between your declared income, management accounts, audited financial statements, and your tax returns can trigger KRA disputes. Your tax advisor will work closely with your in-house accountants to reconcile the figures reported to KRA with your business’s actual financial position.
- Proactive Error Correction and Voluntary Disclosure: KRA doesn’t frown upon errors, but repeated or uncorrected errors. What matters to them is how fast you rectify any errors, whether system, computational, or organizational. A tax advisor will not only spot these errors early but also help make timely amendments, clarifications, and disclosures before KRA reacts.
- Manage KRA Disputes Strategically: KRA audits are no child’s play, and many businesses go through them with a lot of uncertainty and worry. Working with a tax advisor makes audits manageable. They bring expertise, strategy, and structured engagement. A tax advisor manages a KRA audit by coordinating responses to KRA queries, ensuring submissions are accurate, and managing timelines and procedural requirements.
- Resolving Issues at the Objection Stage: Not every KRA assessment has to end in fines, penalties, appeals, or litigation. Taxpayers can resolve issues at the objection stage through solid clarification and an evidence-based objection. A tax advisor can help you submit a strong and well-prepared objection with technical analysis, supporting documentation, and relevant precedent that solves the tax issues without escalating the matter.
Final Words
Most businesses see tax advisory as a reactive mechanism rather than a preventative one. They rush to seek expert guidance when their tax affairs have escalated into disputes with KRA. Because prevention is always better than a cure, businesses should embrace tax advisory services early on.
When a tax advisor is your business partner, you mitigate tax risks early, nail compliance, and align your tax positions with KRA’s expectations. This reduces the emergence of KRA disputes.
Are you ready to prevent KRA disputes by embracing proactive tax advisory? Gichuri & Partners provides practical tax advisory services in Kenya to businesses of all sizes. We help you stay tax compliant, defend your tax positions, and spot red flags before KRA reacts. Contact us today to get started.
