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Effect of Tax Audit on Corporate Tax Compliance in Nigeria

Abstract

Tax audit has become an essential instrument of tax administration for improving voluntary compliance, enhancing revenue generation, and promoting transparency within the tax system. A tax audit is the systematic examination and verification of taxpayers' financial records, tax returns, accounting documents, and other relevant information by tax authorities to determine compliance with applicable tax laws and regulations. Effective tax audits are expected to detect underreporting of income, identify tax evasion, discourage fraudulent tax practices, improve the accuracy of tax declarations, and strengthen confidence in the tax administration system. In Nigeria, the Federal Inland Revenue Service (FIRS) and the State Internal Revenue Services (SIRS) conduct tax audits as part of broader tax administration reforms aimed at improving domestic revenue mobilization and expanding the tax base. The increasing adoption of digital tax administration systems, electronic filing platforms, data analytics, and risk-based audit selection has further enhanced the efficiency and effectiveness of tax audit processes. Despite these developments, challenges such as inadequate taxpayer record-keeping, weak tax awareness, corruption, administrative bottlenecks, limited technological infrastructure, shortage of skilled tax auditors, prolonged audit processes, and disputes between taxpayers and tax authorities continue to affect the effectiveness of tax audits in promoting corporate tax compliance. Although previous studies have examined tax administration and tax enforcement, empirical evidence regarding the effect of tax audit on corporate tax compliance in Nigeria remains limited and inconclusive. Against this background, this study investigates the effect of tax audit on corporate tax compliance in Nigeria. The study is anchored on Deterrence Theory, Economic Deterrence Theory, and the Theory of Planned Behaviour (TPB). Deterrence Theory posits that taxpayers are more likely to comply with tax laws when there is a high probability of tax audits, detection of non-compliance, and the imposition of appropriate sanctions. Economic Deterrence Theory argues that corporate organizations evaluate the costs and benefits of tax compliance, with effective tax audits increasing the expected cost of tax evasion and encouraging lawful tax behaviour. The Theory of Planned Behaviour explains that corporate tax compliance is influenced by taxpayers' attitudes toward taxation, perceived behavioural control, and subjective norms, all of which may be strengthened through effective tax audit programmes. Collectively, these theoretical perspectives provide a comprehensive framework for explaining the relationship between tax audit and corporate tax compliance in Nigeria. The study adopts a quantitative research design using a structured questionnaire administered to tax managers, finance managers, accountants, chief financial officers, tax consultants, internal auditors, external auditors, corporate tax practitioners, and officials of the Federal Inland Revenue Service (FIRS) and selected State Internal Revenue Services (SIRS). A stratified random sampling technique will be employed to ensure adequate representation of respondents from manufacturing, financial services, telecommunications, oil and gas, agriculture, consumer goods, industrial goods, construction, and other corporate sectors operating in Nigeria. Tax audit will be measured using audit frequency, audit effectiveness, audit transparency, audit professionalism, risk-based audit practices, use of digital audit technologies, and fairness of audit procedures, while corporate tax compliance will be measured using timely tax filing, timely tax payment, accuracy of tax returns, compliance with tax regulations, completeness of tax disclosures, maintenance of accounting records, and voluntary tax compliance. Primary data collected from respondents will be analyzed using descriptive statistics to summarize respondents' demographic characteristics and perceptions regarding tax audit and corporate tax compliance. Structural Equation Modeling (SEM) will be employed to examine the effect of tax audit on corporate tax compliance. The measurement model will be evaluated using Cronbach's Alpha, Composite Reliability (CR), Average Variance Extracted (AVE), and Confirmatory Factor Analysis (CFA) to establish the reliability and validity of the research instrument. Additional diagnostic tests, including multicollinearity assessment, common method bias analysis, and model fit indices such as the Comparative Fit Index (CFI), Tucker-Lewis Index (TLI), Root Mean Square Error of Approximation (RMSEA), and Standardized Root Mean Square Residual (SRMR), will be conducted to ensure the adequacy, consistency, reliability, and robustness of the structural model. The study anticipates that tax audit will have a significant positive effect on corporate tax compliance in Nigeria. Effective tax audit programmes are expected to improve compliance with tax laws, increase the accuracy of tax declarations, strengthen record-keeping practices, reduce tax evasion, and encourage timely filing and payment of taxes. Corporate organizations subjected to transparent, professional, and risk-based tax audits are also anticipated to improve internal tax control systems, enhance tax planning, reduce tax disputes, and strengthen regulatory compliance. Furthermore, the integration of digital tax audit technologies, data analytics, and electronic tax administration systems is expected to improve audit efficiency, enhance taxpayer confidence, and support sustainable domestic revenue generation. Conversely, weak audit procedures, inadequate enforcement, corruption, administrative delays, insufficient taxpayer education, and inconsistent application of tax laws may reduce the effectiveness of tax audits, encourage non-compliance, and weaken public confidence in the tax system. Consequently, effective tax audit practices are expected to contribute significantly to improving corporate tax compliance, broadening the tax base, increasing government revenue, and strengthening Nigeria's tax administration system. This study is expected to make significant theoretical and empirical contributions to the literature on taxation, accounting, public finance, and tax administration by providing comprehensive evidence on the relationship between tax audit and corporate tax compliance in Nigeria. Unlike previous studies that broadly examined tax enforcement or tax administration, this research specifically evaluates tax audit as a strategic determinant of corporate tax compliance using primary data and Structural Equation Modeling (SEM). The findings will provide valuable insights for the Federal Inland Revenue Service (FIRS), State Internal Revenue Services (SIRS), the Joint Tax Board (JTB), the Federal Ministry of Finance, policymakers, corporate organizations, tax practitioners, professional accounting bodies, and academic researchers regarding the strategic importance of effective tax audits in strengthening tax compliance and improving domestic revenue mobilization. The study will also provide evidence-based recommendations for strengthening risk-based tax audit systems, expanding digital tax audit technologies, improving taxpayer education, enhancing auditor capacity, reinforcing transparency and fairness in tax audit processes, and fostering a more efficient, equitable, and sustainable tax administration system in Nigeria.

Keywords: Tax audit, corporate tax compliance, tax administration, Federal Inland Revenue Service (FIRS), State Internal Revenue Services (SIRS), tax enforcement, voluntary tax compliance, Structural Equation Modeling (SEM), domestic revenue mobilization, Nigeria.