What To Do During Tax Disputes

Tax disputes can arise at any stage of a business’s relationship with a tax authority. An assessment may be issued after a tax audit, a demand notice may be received for alleged unpaid taxes, or a taxpayer may disagree with the interpretation that has been placed on a particular transaction. In some cases, the dispute may arise from differences in the records maintained by the taxpayer and those held by the tax authority.

For businesses, receiving a tax dispute notice can be stressful. However, the receipt of an assessment or demand notice does not necessarily mean that the taxpayer has no options. A proper response can be made, supporting documents can be provided, and an assessment that is considered incorrect can be challenged through the appropriate process.

Therefore, tax disputes should not be ignored or handled casually. They should be approached systematically, with the relevant facts, records, and applicable tax rules carefully considered.

Understand the Nature of the Dispute

The first step that should be taken when a tax dispute arises is to understand exactly what is being disputed.

A taxpayer may have received a tax audit report, additional assessment, demand notice, penalty notice, or other correspondence from the relevant tax authority. The document should be reviewed carefully so that the specific issues being raised can be identified.

Attention should be given to the tax period involved, the type of tax concerned, the amount being demanded, the basis of the assessment, and any deadlines stated in the notice.

For example, an assessment may have been raised because certain income was considered to have been omitted from a tax return. In another situation, input VAT may have been disallowed because supporting documentation was considered insufficient. Similarly, additional tax may have been assessed because withholding tax or PAYE obligations were considered to have been incorrectly treated.

Once the actual issue has been identified, a proper response can be developed.

Do Not Ignore Tax Notices

One of the most serious mistakes that can be made during a tax dispute is ignoring correspondence from the tax authority.

A tax notice should not be set aside simply because the taxpayer believes that the assessment is incorrect. In many cases, specific procedures and timelines are provided for taxpayers who wish to challenge an assessment.

Therefore, the date on which the notice was received should be recorded. The applicable response period should also be determined, and the necessary action should be commenced promptly.

Ignoring a notice may result in the taxpayer losing an opportunity to present its position within the prescribed process. Furthermore, additional penalties, interest, enforcement actions, or other consequences may arise depending on the circumstances.

A disagreement should, therefore, be formally communicated rather than left unattended.

Review Your Tax Records

After the dispute has been identified, the taxpayer’s records should be reviewed.

The review should cover the tax returns that were filed, financial statements, invoices, receipts, bank statements, payroll records, contracts, withholding tax evidence, VAT records, payment receipts, and other documents relevant to the issue.

The objective should be to determine whether the position taken by the tax authority is supported by the taxpayer’s actual records.

For instance, where additional turnover has been assessed, the taxpayer’s sales records and bank statements may be compared with the figures used in the assessment. Where expenses have been disallowed, the relevant invoices and payment evidence should be examined.

A clear reconciliation can be particularly useful. Differences between the taxpayer’s records and the tax authority’s computation can be identified and explained.

Where errors have been discovered in the taxpayer’s records, they should also be acknowledged and properly addressed rather than being concealed.

Obtain Professional Tax Advice

Tax disputes can become complicated, particularly where significant amounts are involved or where several tax issues are being considered simultaneously.

For this reason, professional advice should be obtained where necessary.

A tax consultant or adviser can review the assessment, examine the taxpayer’s records, identify areas of disagreement, and assist with the preparation of an appropriate response.

Professional assistance can also be useful where technical interpretations of tax legislation are involved. The taxpayer’s position can be presented in a structured manner, while relevant supporting documents can be attached to strengthen the response.

More importantly, an independent review may reveal issues that have been overlooked by the taxpayer.

However, professional advice should not be sought only after a dispute has escalated. Proper tax planning, record keeping, and regular compliance reviews can help to reduce the likelihood of disputes arising in the first place.

Prepare a Formal Objection Where Appropriate

Where a taxpayer disagrees with an assessment, the appropriate objection or dispute-resolution procedure should be followed.

The objection should clearly state the specific items being disputed. It should not merely indicate that the taxpayer is unhappy with the assessment.

The basis for the disagreement should be explained, and relevant documents should be provided to support the taxpayer’s position.

For example, if an amount has been treated as taxable income when it was actually a non-taxable receipt, the relevant evidence and explanation should be presented. If a tax credit or withholding tax suffered has not been recognised, evidence of the relevant deduction and payment should be provided.

A well-prepared objection should be factual, organised, and supported by evidence.

Furthermore, the taxpayer should ensure that the applicable procedural requirements and deadlines are observed.

Keep Proper Supporting Documents

Documentation is one of the strongest forms of protection available to a taxpayer during a dispute.

A position that cannot be supported by reliable records may be difficult to defend, even where the taxpayer believes that the position is correct.

Businesses should, therefore, maintain proper records of transactions and tax-related activities. These may include invoices, receipts, contracts, bank statements, payroll records, tax returns, payment evidence, tax clearance certificates, withholding tax credit notes, VAT schedules, and correspondence with tax authorities.

The records should also be properly organised.

When a tax dispute arises, time can be saved when the required documents can be located quickly. A well-maintained filing system also makes it easier for tax advisers to understand the circumstances surrounding the dispute.

Ultimately, good record keeping should not be viewed merely as an administrative requirement. It can become an important defence mechanism during a tax audit or dispute.

Communicate Professionally With the Tax Authority

The manner in which a tax dispute is handled can also affect the process.

Communication with the tax authority should remain professional, factual, and respectful. Emotional or confrontational responses should be avoided, even where the taxpayer strongly disagrees with the assessment.

All relevant correspondence should be properly documented. Where meetings are held, the key discussions and agreed action points should be recorded.

Requests for clarification should also be made where the basis of an assessment is unclear.

In addition, responses should be consistent. Information provided during meetings, written submissions, and subsequent correspondence should not contradict the taxpayer’s records or earlier explanations without a clear reason.

Effective communication can help to ensure that the taxpayer’s position is properly understood.

Reconcile the Figures

Tax disputes are often driven by differences in figures.

Consequently, a detailed reconciliation should be prepared where necessary.

The taxpayer’s accounting records should be compared with the tax returns submitted and the figures contained in the assessment. Any differences should then be investigated.

For example, differences may arise because of timing issues, duplicated transactions, omitted entries, accounting classifications, exchange-rate differences, or transactions that have been incorrectly interpreted.

Once the differences have been identified, explanations should be provided together with supporting documentation.

A reconciliation does more than present numbers. It demonstrates how the taxpayer arrived at its position and allows the disputed amounts to be examined more objectively.

Consider Settlement Where Appropriate

Not every tax dispute needs to become a prolonged conflict.

Where an error has been identified or where part of an assessment is accepted, the taxpayer may consider resolving the undisputed portion while continuing to address the genuinely disputed items through the appropriate process.

A settlement may sometimes be more practical than allowing a dispute to continue indefinitely, particularly where the commercial cost of the dispute is significant.

However, any settlement or payment arrangement should be properly evaluated. The taxpayer should understand what is being accepted, what remains disputed, and what obligations will arise from the agreement.

Professional advice may be useful before a significant settlement decision is made.

Escalate the Dispute When Necessary

Where the taxpayer’s objection has not resolved the matter, further dispute-resolution options may be available under the applicable tax framework.

The appropriate route will depend on the nature of the dispute, the tax authority involved, the stage reached, and the relevant Nigerian tax laws and procedures.

At this stage, professional representation may become particularly important.

The taxpayer’s records, previous submissions, assessment notices, correspondence, and responses should be reviewed as part of the escalation process. A consistent position should then be maintained.

The objective should not simply be to prolong the disagreement. Instead, the focus should remain on obtaining a fair and legally supportable resolution.

Avoid Future Tax Disputes

While attention is often focused on resolving an existing dispute, steps should also be taken to prevent similar issues from occurring again.

Businesses should conduct regular tax compliance reviews. Tax returns should be reconciled with accounting records before submission. PAYE, VAT, withholding tax, company income tax, and other applicable obligations should be monitored carefully.

Furthermore, tax notices and correspondence should be reviewed promptly when received.

Internal controls should also be established to ensure that tax deadlines are tracked and responsibilities are clearly assigned.

Where tax laws or administrative requirements change, the business should ensure that its compliance procedures are updated accordingly.

Prevention is often less expensive than dispute resolution.

Conclusion

Tax disputes should not automatically be viewed as a crisis. However, they should be treated seriously and addressed promptly.

Once a tax assessment, demand notice, or audit finding has been received, the issue should first be understood. The taxpayer’s records should then be reviewed, the figures should be reconciled, and appropriate professional advice should be obtained where necessary.

Where the assessment is considered incorrect, the taxpayer’s position should be formally presented through the applicable objection or dispute-resolution process. Supporting documents should be provided, deadlines should be observed, and communication with the tax authority should remain professional.

Most importantly, tax disputes should not be ignored.

A well-managed tax dispute is built on accurate records, clear explanations, proper documentation, timely action, and professional guidance. By adopting these practices, businesses can protect their interests while working towards a fair and effective resolution of tax disagreements.

For businesses operating in Nigeria, tax compliance should therefore be viewed as an ongoing process rather than an activity that begins only when a tax dispute arises. Proper compliance today can significantly reduce the risks and costs associated with tax disputes tomorrow.