THE ROLE OF TAX AUDITS IN REVEALING THE TRUE INCOME OF TAXPAYERS

Abstract

This empirical investigation explores the pivotal function of tax audits in identifying inconsistencies between declared income and actual earnings, thereby enhancing compliance and improving tax revenue collection. Conducted as a field-based case study, the research focused on the corporate and tax audit divisions of the National Revenue Authority, specifically examining Company A—a publicly listed contracting enterprise established in 2008 with an initial capital investment of 2 billion dinars. The analysis reviewed the tax audit processes carried out for the fiscal years 2017, 2018, and 2019. Findings reveal that tax audits significantly contribute to accurately estimating taxpayers’ actual income level. In Company A, substantial differences were realized with the level of Disallowance for expenses ranging from 80 to 100 percent due to inadequate documentation and poor conformity to specified standards. The auditing led to an amount of additional tax amounting to 249,733,530 dinars within the three-year period and establishes the substantial fiscal gains realized through vigilant audit exercises. These findings establish the significance of tax audits in ensuring taxpayers are in statutory compliance and do not under-state revenues. The field implications of this study reveal that tax administrations should have effective audit procedures capable of detecting and mobilising liable taxes. The empirical validation also establishes the usefulness of tax audits in revealing taxpayers’ actual monetary position.