Effect of Tax Audits on Tax Compliance of Small and Medium Sized Enterprises in Nairobi County, Kenya

Abstract

The purpose of this study was to investigate the effect of tax audits in enhancing taxation compliance among small and medium-sized enterprises (SMEs) in Nairobi County, Kenya. The study was grounded on the economic theory of tax compliance and the target population was small and medium-sized enterprises in Nairobi County from which a sample of 399 constituting the managers and owners of SMEs in the County was obtained. The research applied the positivism research philosophy and descriptive cross-sectional design making use of a structured questionnaire for data collection. The data obtained were analyzed through descriptive and regression analysis using SPSS. The findings indicated that there was a moderate positive relationship between tax audits and tax compliance (R = 0.318). Moreover, tax audits had a significant positive influence on tax compliance among SMEs in Nairobi County, Kenya (β = 0.423, t = 7.656, p < 0.05). This, therefore, depicted that tax audit is key in enhancing tax compliance of SMEs in Nairobi County, Kenya. This study recommends that tax administrators should structure their audits to ensure at least every three years the SMEs are subjected to a tax audit. The audits can be sectoral based or based on embedded risk parameters identified by the tax administration. Besides, tax administration should have a systematic risk-based methodology that quickly identifies taxpayers to be audited and has an elaborate system of monitoring the results that come from these auditing initiatives.