Lagos
A recent notice by the Lagos State Internal Revenue Service (LIRS) directing banks, employers, and other third parties to remit funds belonging to tax defaulters to the state government has triggered widespread public concern, confusion, and debate. Many Nigerians interpreted the directive as a new policy that allows government agencies to seize money from bank accounts at will.
However, LIRS has moved to clarify the situation, insisting that the action is not new, not arbitrary, and not a surprise enforcement measure, but a long-standing legal provision backed by existing tax laws and recently reinforced under the Nigeria Tax Administration Act, 2025.
According to the agency, the process — known in tax administration as “power of substitution” — only applies after a taxpayer’s liability has been fully established and the taxpayer has failed to pay despite being given adequate opportunity.
Explaining the law, the Special Adviser to the LIRS Chairman, Tokunbo Akande, said the provision has existed for years and is only activated as a last resort.
“What you need to know is that it’s nothing new because the law has always been there,” Akande said. “It is only activated when there is a confirmed tax debt. It is not applied arbitrarily.”
Under the power of substitution, LIRS can legally appoint a third party who holds money on behalf of a tax defaulter — or owes money to that person — to remit the outstanding tax directly to the government instead of paying the defaulter.
In practical terms, this means that if a taxpayer refuses to settle a final tax obligation, LIRS can instruct a bank, employer, tenant, customer, or business partner to redirect the money due to the taxpayer to the state treasury.
Akande illustrated it this way:
“If Mr X owes the government tax and is expecting payment from Mr Y, the tax authority can write to Mr Y and appoint him as an agent of the government to recover that money. You are due to pay someone who is owing the government, and the law allows us to recover the tax from that payment.”
The renewed public debate followed a public notice issued by LIRS on January 21, 2026, titled “Power of Substitution pursuant to Section 60 of the Nigeria Tax Administration Act, 2025.” The notice was signed by LIRS Chairman, Ayodele Subair, and addressed to employers, banks, financial institutions, business operators, tax agents, and other stakeholders.
In the notice, LIRS reminded the public that Section 60 of the Act gives it legal authority to recover unpaid taxes through third parties where a taxpayer has failed to pay an established and final tax liability.
The agency listed banks, employers, tenants, debtors, customers, agents, and business partners among institutions that may receive substitution notices. It also warned that failure to comply is an offence under the law, outlining timelines, reporting obligations, and penalties for non-compliance.
The wording of the notice, and the timing of its release, sparked anxiety among account holders, small business owners, and salary earners, many of whom feared that their funds could be frozen or seized without notice.
LIRS insists those fears are misplaced. Akande stressed that the power of substitution is not automatic, not random, and not used without due process.
“It only applies when all rules are followed, and the tax liability is final,” he said. “It’s not for random people, and there is nothing to fear.”
He added that similar mechanisms are used by tax authorities around the world, describing substitution as a standard enforcement tool in modern tax systems designed to discourage chronic non-compliance.
“Other countries use this same approach. It is part of global best practice in tax administration,” Akande noted.
Under Nigerian tax law, a tax liability becomes final only after:
- The taxpayer has been assessed,
- The taxpayer has been notified,
- The objection and appeal windows have closed, or
- All disputes have been resolved and the taxpayer still refuses to pay.
Only at that point can enforcement measures like substitution be triggered.
Tax experts say this is meant to protect taxpayers from abuse while ensuring that government revenue is not held hostage by deliberate defaulters who exploit legal delays.
The clarification comes as the Nigeria Tax Administration Act, 2025 takes full effect nationwide. The law was introduced to harmonise tax administration across federal and state levels, reduce loopholes, improve compliance, and strengthen revenue collection in a period of economic strain.
State governments, including Lagos, are under growing pressure to raise internally generated revenue to fund infrastructure, healthcare, education, and security — especially as federal allocations fluctuate.
LIRS said the substitution mechanism is part of that broader effort, but stressed that it remains targeted, regulated, and guided strictly by law.
For ordinary Nigerians who are compliant with their tax obligations, the agency says there is no cause for alarm. The measure is aimed squarely at individuals and businesses with established and unpaid tax debts, not at law-abiding citizens.
For employers, banks, and business partners, however, the law now imposes a clear obligation: once a substitution notice is issued, they become legally required to act as agents of government and remit the specified funds.
Failure to do so, LIRS warns, is itself a violation of the law.
The controversy surrounding LIRS’ directive reflects deeper anxiety about government enforcement in a tough economy. But officials insist the power of substitution is neither a new weapon nor a blanket seizure tool — it is a legal last resort meant to ensure fairness, accountability, and compliance in Nigeria’s tax system.
As the new tax law beds in, Nigerians can expect more enforcement — but also clearer rules — as authorities seek to balance revenue collection with due process and public trust.