Tax reforms: Bank narrations to determine liability

DAMILOLA AINA examines how Nigeria’s planned tax reforms from 2026 will make bank transfer narrations a key factor in determining personal and business tax obligations. Using real-life scenarios and expert insights, it explains why unexplained inflows may be treated as taxable income, how poor documentation could trigger disputes, and why clearer transaction descriptions and better record-keeping are becoming essential for Nigerians, especially those in the informal economy

Adeola Folarin, a trader in Kubwa, Abuja, never worried about bank transfer narrations. From her small but busy shop in the suburban district, the provision and perfume trader watched customers troop in daily: civil servants after work, students on weekends, and neighbours picking up groceries and fragrances. Payments were seamless: a quick transfer, a phone vibration, a credit alert, and the goods changed hands. Most of the alerts carried no story, just numbers.

For Adeola, this was no issue. The transfers were instant; the goods were already on the counter and exchanged. Her personal bank account doubled as her business account, quietly absorbing dozens of transfers each day: N7,500 here, N18,000 there, and N65,000 for bulk perfume orders. Business was booming.

What Adeola did not see was how those silent alerts were slowly building a different kind of profile, one that did not distinguish between sales, restocking refunds, cooperative contributions, or the occasional support from family. To her, it is a routine credit alert. To Nigeria’s tax authorities, it is like undeclared taxable income.

By day, Ibrahim Musa is a mid-level administrative officer at a federal agency in Abuja, his salary paid monthly and neatly taxed under the PAYE system. His payslip is predictable, his deductions are automatic, and his taxes are settled before the money ever hits his account.

By night and on weekends, Ibrahim runs a different life. From his living room in Karu, he sells phone accessories and small electronics, chargers, earbuds, and power banks sourced through online vendors and resold to colleagues and friends. The business is not registered. It started as a side hustle in his university days, a way to cushion rising living costs and school fees.

Payments flow into the same personal account that receives his salary. Just like Adeola, Ibrahim never paid attention to bank narrations. No descriptions. No distinction between salary, business income, or refunds.

At month’s end, his statement tells a confusing story: one salary credit and dozens of smaller inflows scattered through the weeks, all undocumented.

But as Nigeria prepares to implement a new tax regime expected to take effect in January 2026, stories like Adeola’s and Ibrahim’s are likely to become common.

Under the evolving system, tax authorities are expected to rely more on bank transaction histories to determine taxable income, especially for traders and self-employed Nigerians outside PAYE. Those steady side-hustle inflows could be interpreted as undeclared income, regardless of intent or scale.

Without clear descriptions, Adeola’s and Ibrahim’s accounts could appear to be receiving steady, unexplained income. In the eyes of a data-driven tax system, visibility matters more than intent.

For years, Nigerians have treated bank narrations as optional. Transfers are often sent with vague phrases like “Thanks”, “For something”, or “Balance”, or the narration field is left entirely blank. In informal commerce, especially among freelancers, traders, content creators, and small businesses, narration has rarely mattered.

From January 2026, that habit could become a costly mistake.

As the Federal Government prepares to roll out a new tax regime anchored on financial data and digital records, bank transaction histories will increasingly serve as a key tool for determining how much individuals and businesses should pay in taxes.

Under the emerging framework, tax authorities will rely more heavily on bank inflows and transaction patterns to assess income, particularly for Nigerians outside the Pay-As-You-Earn system. This means that every credit alert matters.

According to financial and tax analysts, unexplained or poorly described inflows may be treated as taxable income unless proven otherwise. Transfers that are refunds, loans, gifts, family support, or reimbursements could be wrongly classified if they lack clear narration and supporting records.

In effect, what enters a bank account without explanation may be assumed to be earnings. This is the new reality Nigerians must prepare for.

Why descriptions now matter

Under the evolving tax system, government agencies are moving towards transaction-based income profiling. This means regular inflows may be interpreted as earnings, repeated transfers without explanations could be flagged, and inconsistencies between lifestyle, declared income, and bank activity may trigger audits.

The era when salaried workers paid PAYE while side hustles, freelance income, rentals, online sales, and professional fees went largely untaxed will also fade. Tax authorities are now focused on capturing the informal and semi-formal economy, which accounts for over 50 per cent of Nigeria’s GDP, according to economic estimates.

Nigeria’s banking system processes over N600tn in electronic transactions annually, driven by mobile banking, USSD, transfers, and digital platforms. With financial inclusion now above 74 per cent, more Nigerians are visible to the system than ever before.

This growing digital footprint has become a powerful tool for government revenue agencies facing shrinking oil earnings and rising public expenditure.

Instead of asking, “How much do you earn?”, tax authorities can now ask, “Why did N15m pass through your account this year?”

And the only credible way to substantiate your earnings is through clear, accurate, and properly titled bank transfer narrations that explicitly state the reason for each payment received.

The new tax approach shifts the focus from employment alone to total economic activity. This includes freelance jobs, consultancy fees, online sales and digital services, rent and short-let income, side businesses, and professional services.

Without clear transaction descriptions, separating taxable income from non-taxable inflows, such as refunds, loans, family support, cooperative contributions, or reimbursements, becomes difficult. And when in doubt, the system may assume the worst.

Tax experts warn that the biggest casualty of poor narration will be avoidable tax disputes. A single unexplained inflow may not raise eyebrows, but patterns over time can trigger queries. Once flagged, taxpayers may be asked to justify transactions, provide receipts or contracts, and reconcile bank inflows with tax filings.

Without clear records, defending oneself becomes harder and costlier.

You also have to re-examine the description; saying “thank you” doesn’t explain the reason for the transaction. Simple descriptions can make a powerful difference: “Refund for goods returned”, “Loan repayment, personal”, “Family support, non-income”, “Client payment, graphic design service”.

Such details help establish intent and context long before questions arise. Equally important is record-keeping: saving invoices, agreements, receipts, and digital confirmations that support those narrations.

Already, fear and anxiety are rife, with many Nigerians expressing reservations about the likely effect. There is little doubt that deeper transaction scrutiny will generate public resistance, especially among informal workers already struggling with inflation, weak purchasing power, and rising living costs.

However, tax experts argue that compliance is cheaper than conflict. Rather than waiting for the tax authorities to knock, many Nigerians are beginning to adjust how they move money, focusing on clearer transaction narrations, better records, and stricter separation between personal and business finances.

The thinking, increasingly echoed on social media, is simple: those who adapt early stand a better chance of navigating the transition smoothly.

For weeks, X (formerly Twitter) has been awash with warnings, guides, and cautionary notes from finance coaches and tax commentators, reflecting growing anxiety among everyday earners. One widely shared post by @hannytalker summed up the mood bluntly: “We are less than one week away from the beginning of the new tax regime. Please do not neglect proper payment descriptions.” The user warned that vague narrations could expose account holders to double taxation or unnecessary scrutiny, urging Nigerians to clearly explain inflows and outflows, whether transfers between personal accounts, loans, gifts, or routine POS withdrawals. “Otherwise, hands go touch your money,” the tweet cautioned, capturing the fear driving the sudden attention to transaction discipline.

Beyond humour and streetwise language lies a deeper concern about how Nigeria’s tax law allocates responsibility. A personal finance coach, JP Attueyi, sparked intense debate with a thread that many users described as “uncomfortable but necessary.” According to him, the law does not concern itself with intent or hardship. “If money touched your account… the law assumes it is taxable until YOU prove otherwise,” he wrote, stressing that the burden of explanation sits squarely with the taxpayer. In his words, if you cannot explain why money came in, what category it falls under, or whether tax has already been paid, “then by default, it becomes assessable income.”

This shift, commentators argue, disproportionately affects informal earners: freelancers, side hustlers, gig workers, and salary earners who casually receive transfers without documentation. Attueyi noted that while large corporations already structure income and classify expenses meticulously, the “average Nigerian” often moves money emotionally and informally. “The law punishes that,” he warned, describing a system where ignorance becomes liability and survival money risks being treated as taxable income.

Others have tried to inject clarity into the debate. Another X user, KingLeo, addressed one of the most common fears: savings. “Will I be taxed for normal savings? NO,” he wrote, explaining that money already earned and taxed, when moved into savings accounts, fixed deposits, cooperative societies, or pension schemes, does not attract fresh tax. However, he reinforced that narration still matters, especially for businesses and limited liability companies. “When FIRS or an auditor looks at your account, they see only who sent the money, how much, and the description,” he noted. “If you label it wrongly, they assume the worst and tax it.”

The conversation has also revived an old but often-ignored principle: separating personal and business finances. Several posts warned that mixing accounts could lead to double taxation, with advice for business owners to route major transactions through business accounts and pay themselves structured salaries. As one commentator put it, “Your best defence against the taxman is documentation… organisation beats fear.”

Taken together, the social media discourse reveals a growing realisation that the new tax framework is less about higher rates and more about higher expectations. As Attueyi observed in another post, “Income is no longer just what you think you earned. It’s what passed through you.” In an economy where digital transfers have replaced cash, Nigerians are learning, sometimes uncomfortably, that silence, poor records, and vague descriptions are no longer harmless.

Commenting, the Director of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, has cautioned tax authorities against relying on bank transactions or account balances as a basis for determining tax liability, warning that such an approach could be unfair and counterproductive, especially for operators in the informal sector.

Speaking in a telephone interview with our correspondent, Yusuf said most taxes are meant to be assessed on profit and, in some cases, specific transactions, not on the volume of money passing through an individual’s bank account. He argued that bank inflows alone do not accurately reflect the benefits or profits earned by an account holder.

He illustrated his point with the example of contractors handling funds on behalf of clients. According to him, a contractor receiving large sums for the purchase of cement and other building materials may record high account turnover, even though the money does not belong to the contractor. Yusuf noted that treating such inflows as taxable income would amount to an unfair assessment.

The CPPE director also expressed concern about the structure of Nigeria’s economy, which he said is dominated by informal sector operators who lack proper record-keeping systems. He explained that many of these individuals do not clearly distinguish between revenue and profit, do not file tax returns, and often have no audited financial statements, with some lacking basic financial literacy.

“Take, for instance, if someone is a contractor for someone else who is building a house and the person building the house is sending money to you for cement and other building materials. The turnover in that type of account is likely to be high. But that is not your money; it is for someone else. So, if someone filed to FIRS that the account has received a lot of money, that is unfair.

“We need to be careful, and we have so many people in the informal sector who don’t even have proper records. They don’t know what their revenue or profit is. But they do a lot of transactions. Some of them are not even literate. They don’t file returns or even understand what you mean by filing returns. They don’t have audited financial statements. So, if the tax officer starts using the best judgement to determine the amount of tax those types of people should pay, it is not going to be easy.

“The fact that you have transactions in your account doesn’t mean you are running a profitable business,” he added.

Yusuf warned that the use of “best of judgement” assessments by tax officers for such taxpayers could create significant difficulties and resentment. He stressed that frequent transactions in a bank account do not automatically translate to a profitable business.

He added that the implementation of the new tax laws would come with considerable challenges and should be handled with caution to avoid unintended consequences. According to him, authorities may need to review aspects of the framework during implementation, particularly given the size of the informal economy, to prevent a backlash that could undermine compliance and public trust.

“So, there are a lot of challenges around the implementation of these new tax laws. So, we have to be very careful in the implementation and may need to review a lot of things during the implementation process. We need to recognise that the economy has a very large informal sector. And we need to be careful about using bank transactions to determine the amount of taxes to be paid. So that it doesn’t have a serious backlash,” he concluded.

Ultimately, the push for transaction narration is not just about tax. It reflects a broader shift towards financial transparency, accountability, and formalisation of economic activity.

In the coming days, a bank alert will no longer be “just an alert”. It will be a financial statement, a tax record, and a potential audit trail, all rolled into one.

For millions of Nigerians, the message is simple: what you write, or fail to write, in your transfer description may determine what you pay in tax tomorrow.

As Nigeria tightens its tax net, bank narrations may become the simplest and cheapest form of tax protection available to individuals and small businesses. (Punch)