Tax Audit and Investigation on Revenue Generation in Ogun State Board of Internal Revenue

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Taxation is one of the oldest methods of generating public revenue. In Nigeria, it existed even before the arrival of colonial rule (Samuel & Simon, 2018). It involves a compulsory levy imposed by the government on individuals, partnerships, and corporations to finance public services and infrastructure (Samuel & Simon, 2018). Income tax, in particular, remains a major source of revenue for national and state governments. In Nigeria, the Federal Government depends largely on taxes to fund essential services such as education, health, and infrastructure (Yunusa, 2018). Consequently, effective taxation directly supports national development.

Over time, taxation has become a major tool for promoting sustainable economic growth and reducing dependence on oil revenues (Ola, 2020). In most developed countries, taxes contribute significantly to the national budget. However, in Nigeria, the contribution of taxation remains below expectations. The fall in oil prices has worsened this problem, forcing state governments to look inward for alternative revenue sources (Aguolu, 2019). Therefore, efficient tax administration has become essential for national and subnational development.

According to Aguolu (2019), taxation may not yield the largest share of total government income, but it is the most stable and predictable source of revenue. Nonetheless, poor tax administration and widespread evasion continue to undermine its potential (Oyedokun, 2017). Many Nigerians engage in tax avoidance and evasion due to weak enforcement mechanisms and administrative inefficiencies (Olaoye, Ogunleye & Solanke, 2018). Similarly, Philips (2016) observed that poor management practices contribute significantly to tax revenue losses.

A tax audit involves examining the financial records of individuals or companies to ensure accurate reporting and compliance with tax laws. Furthermore, tax investigation identifies fraud, evasion, or irregularities that reduce government income. Programs such as tax amnesty also provide an opportunity for taxpayers to clear outstanding liabilities without penalties (Adesina & Uyioghosa, 2016). However, despite these measures, tax evasion continues to affect revenue performance in states such as Ogun.

For example, the Federal Inland Revenue Service (FIRS) recorded a tax shortfall of ₦861.76 billion in 2017 and ₦1.4 trillion in 2018, representing 18% and 21% of planned revenue respectively (Punch, 2019). Similarly, most states rely heavily on PAYE taxes, leaving other potential sources underexploited (Olaoye & Ogundipe, 2018). This overreliance on salaried workers limits the growth of internally generated revenue.

The ability of any government to perform its duties depends on the amount of revenue it generates (Awotomilusi, 2020). Therefore, a strong tax audit and investigation framework ensures proper accountability, transparency, and improved compliance. However, Nigeria’s tax administration still struggles with corruption, lack of technology, and poor enforcement. Consequently, revenue generation remains low compared to the country’s economic potential.

This study therefore examines tax audit and investigation as tools for improving revenue generation in the Ogun State Board of Internal Revenue.

1.2 Statement of the Problem

Many scholars argue that corruption and poor transparency among tax officials have weakened revenue collection in Nigeria (Adesina & Uyioghosa, 2016; Ogbonna & Appah, 2018). Moreover, non-compliance among taxpayers further reduces expected income. As a result, collecting the correct tax amount has become a major challenge.

Although tax audit and investigation were introduced to reduce fraud and improve efficiency, their effectiveness remains unclear in many states, including Ogun. Therefore, this study investigates how tax audit and investigation influence revenue generation in the Ogun State Board of Internal Revenue.

1.3 Objectives of the Study

The general objective of this study is to assess the effect of tax audit and investigation on revenue generation in Ogun State.
The specific objectives are:

1. To examine the relationship between regular tax audit and personal revenue generation in Ogun State.

2. To determine the effect of tax amnesty on corporate revenue generation in Ogun State.

3. To assess the impact of tax enforcement on public revenue generation.

4. To suggest better ways of conducting tax audits to enhance revenue generation.

1.4 Research Questions

1. What is the effect of regular tax audits on personal revenue generation in Ogun State?

2. How does tax amnesty affect corporate revenue generation?

3. What is the relationship between tax enforcement and public revenue generation?

4. What measures can improve tax audit procedures to enhance revenue generation?

1.5 Research Hypotheses

Ho₁: There is no significant relationship between regular tax audit and personal revenue generation in Ogun State.
Ho₂: There is no significant relationship between tax amnesty and corporate revenue generation in Ogun State.
Ho₃: There is no significant relationship between tax enforcement and public revenue generation in Ogun State.
Ho₄: There are no significant alternative methods of tax audit that can improve revenue generation.

1.6 Justification of the Study

Earlier studies, such as Ladi and Henry (2015), found that effective tax audits significantly improve revenue performance. However, many of these studies focused on federal agencies rather than state boards. Therefore, this study bridges that gap by focusing on Ogun State. Moreover, the research supports policymakers, tax authorities, and auditors in identifying weaknesses in the current audit framework and suggesting improvements.

1.7 Significance of the Study

This study is relevant to multiple stakeholders:

• Government: The results will guide policymakers in developing strategies to enhance tax compliance and increase internally generated revenue.

• Auditors and Tax Authorities: It will help improve auditing standards and introduce technology-driven approaches.

• Ogun State Board of Internal Revenue: The study provides insight into improving operational efficiency and policy implementation.

• Citizens: Improved revenue collection translates to better infrastructure and public welfare.

• Researchers: The study contributes to the academic literature on tax administration, offering a foundation for future research.

1.8 Scope of the Study

The study focuses on the Ogun State Board of Internal Revenue, examining staff and management perspectives on tax audit, enforcement, and amnesty. It adopts a quantitative approach using structured questionnaires distributed to 114 respondents selected through a simple random sampling technique.

1.9 Operationalization of Variables

• Independent Variable: Tax Audit (X), proxied by Tax Audit (TA), Tax Amnesty (TM), and Tax Enforcement (TE).

• Dependent Variable: Revenue Generation (Y), proxied by Personal Revenue (PR), Corporate Revenue (CR), and Public Revenue (PU).

Functional relationships:
Y = f(X)
Y₁ = f(x₁), Y₂ = f(x₂), Y₃ = f(x₃)

1.10 Definition of Terms

• Tax Audit: Examination of a taxpayer’s financial records to confirm compliance with tax laws.

• Tax Investigation: Process of identifying fraud, evasion, or irregularities in tax reporting.

• Revenue Generation: All forms of income raised by the government to fund public expenditure.

• Tax Amnesty: A limited-time opportunity for taxpayers to pay outstanding taxes without penalties.

• Tax Enforcement: The implementation of laws and penalties to ensure compliance.

• Personal Revenue: Income earned by individuals.

• Corporate Revenue: Income generated by companies from business operations.

• Public Revenue: Total income the government receives from tax and non-tax sources.