9 Common Tax Compliance Mistakes That Lead to Fines & Penalties
There are some frequent mistakes that businesses or individuals make when delivering their tax obligations that can trigger legal or financial repercussions from the tax authorities. These errors often result in penalties, fines, audits, and can materially impact the financial health and image of a taxpayer or company.
Tax Compliance
Tax compliance involved the process of ensuring that a taxpayer, including individual or company meets all legal requirements arising from taxation. This includes:
- Registering with the relevant tax authorities
- Keeping proper financial records and documentation
- Timely and accurate filing of returns
- Paying the correct amount of tax due
Common Tax Mistakes
These are common errors often identified by the tax authorities among taxpayers due to ignorance of tax laws, lack of oversight, negligence, or deliberate non-compliance.
Fines & Penalties
These are monetary charges imposed by the tax authorities as punishment for non-compliance. They can be in form of:
- Fixed amount
- Percentage penalties (e.g., a percentage of the unpaid tax)
- Interest charges (at the prevailing CBN rate)
- Criminal charges or prosecution (In serious cases)
Let’s explore common tax compliance mistakes that lead to fines and penalties below:
1. Late Filing of Tax Returns
- Issue: Failure to submit tax returns by the required deadline.
- Consequence: Penalties for late filing. This may increase if delay persists or continues.
2. Late Payment or Underpayment of Taxes
- Issue: Failure to pay the full tax amount on or before the due date.
- Consequence: Accrued interest and additional penalties.
3. Inaccurate Reporting of Income
- Issue: Understating income or overstating expenses to reduce tax liability.
- Consequence: This is often considered as tax evasion and can lead to audits, penalties, and even legal action.
4. Improper Record Keeping
- Issue: Failure to maintain accurate or sufficient records that show income, expenses, payroll, and other financial transactions.
- Consequence: There may be difficulty in corroborating tax returns during tax audit, leading to additional assessments and penalties.
5. Failure to Register for Taxes
- Issue: Operating business without registering for tax purposes, including CIT, VAT, or PAYE.
- Consequence: Penalties for failure to register or late registration.
6. Non-remittance of WHT, VAT, or PAYE
- Issue: Failure to remit tax deducted from vendors, contracts, or employees to the relevant tax authority.
- Consequence: This can attract substantial penalties and interest.
7. Ignoring Tax Notices
- Issue: Failure to respond to queries, assessments, or audit invitations from tax authorities.
- Consequence: This may lead to enforced assessments, penalties, or closure of business premises.
8. Misclassification of Employees
- Issue: Classifying employees as independent contractors to avoid remitting payroll taxes.
- Consequence: This can be considered fraudulent and attract back taxes, penalties, and interest.
9. Claiming Ineligible Deductions
- Issue: Claiming expenses not allowable under Nigerian tax law (e.g., recording personal expenses as business expenses).
- Consequence: Adjustment of returns and penalties.
In Summary
Tax compliance requires paying accurate taxes timely. Common tax mistakes may seem insignificant but can result in material financial and legal consequences. Being tax compliant, proactive, keeping proper records and documentation, and most importantly, seeking professional advice, can help avoid these pitfalls.
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