FACTORS AFFECTING TAX AUDIT EFFECTIVENESS IN KENYA REVENUE AUTHORITY: A CASE OF SOUTH RIFT-VALLEY REGION

Abstract

Tax income forms a very significant portion of government revenue. Taxation is geared towards generating revenue for the government to cater for its expenditure. In spite of recording remarkable revenue growth and implementing many initiatives such as carrying out an audit of taxpayers to improve tax collection, Kenya Revenue Authority did not achieve its revenue targets over the period under study. An ineffective tax audit has been considered as one of the many reasons behind non-compliance to tax laws and revenue loss. The audit of taxpayers plays an important role in the administration of tax laws. Its primary role is detecting and preventing non-compliance. The taxpayers, both large and small pose a risk that their reported taxable income is not correct due to under declaration of business income or overstating the expenses against business income. All these risks lead to a reduction or loss of tax revenue to the government. Therefore, the present study sought to evaluate the selected factors affecting tax audit effectiveness in Kenya. Specifically, it sought to examine the effect of audit case selection, staff capacity, tax dispute resolution mechanism, and Interpretation of tax laws on tax audit effectiveness in Kenya Revenue Authority-South rift valley region. The study was premised on the Theory of Inspired Confidence, Policy Learning Theory, Optimal Theory of Taxation, and Hoffman‟s Tax Planning Theory. The study used a descriptive research design targeting a population of 80 respondents, consisting of tax officers in South Rift Valley Region; therefore, it adopted a census method. Questionnaires were used to collect data after being subjected to the tests for validity by pre-testing the instruments, engaging independent experts to evaluate it, and doing a pilot test which assists in the restructuring of the questionnaire to suit the information required from respondents. The reliability of the research instrument was checked by doing a Testretest

of the same. Data were analyzed using descriptive statistics and inferential statistics. The study has added new knowledge to the existing literature on taxpayer audits and also provided a recommendation on how tax compliance can be enhanced through tax audit initiative. The findings revealed that audit case selection (β = 0.479, p <0.05) and tax audit staff capacity (β = 0.136, p < 0.05) are directly related to tax audit effectiveness in South Rift Valley Region. However, the tax disputes resolution mechanisms (β = -0.009, p ˃ 0.05) and interpretation of tax laws (β = -0.042, p ˃ 0.05) are inversely related to tax audit effectiveness in the area as per the joint regression model. The study recommends that there is need to improve on the audit case selection procedures. There is also need for KRA to organize regular training for all its staff to enable them to be more competent in their work. The study also recommends that additional policy interventions be made on the tax dispute resolution mechanisms to enable the expedition of tax disputes and prevent accrual of dues and unresolved disputes. Finally, tax laws need to be simplified to improve the application and administration of the tax laws and procedures.