The Lagos State Internal Revenue Service (LIRS) has enforced specific provisions of the Nigeria Tax Administration Act (NTAA) 2025 that allow it to recover unpaid taxes directly from banks, employers, and other third parties holding funds on behalf of defaulting taxpayers, but experts warn that enforcement could face legal and regulatory challenges.
In a recent publication made by LIRS on its website, the tax authority said it would exercise its statutory ‘power of substitution,’ which enables it to direct any person or institution owing money to a taxpayer, or holding funds on their behalf, to remit such sums to the government in settlement of outstanding tax liabilities.
Section 60 of the Nigeria Tax Administration Act (NTAA) 2025 highlights the legal basis for LIRS’s move to recover unpaid taxes from banks, employers, and other third parties.
“The relevant tax authority may, by notice in writing, appoint any person to be the agent of a taxable person where any tax has become due and payable, and the taxable person has refused or failed to pay, or the agent has the money, funds, or assets of the taxable person,” the law states.
Under this provision, banks, employers, or other holders of funds can be directed to remit sums to the government to settle outstanding tax liabilities.
Experts note, however, that objection and appeal rights still apply, meaning that the LIRS must follow due process before enforcing such recovery.
According to Oluwasegun Osindana, a tax consultant, Section 49 of the NTAA sets out clear conditions that must be met before recovery can lawfully commence.
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“Recovery can only take place where a court has issued a judgment on the assessment or where a taxpayer fails to object within the statutory timeline,” Osindana said. “Absent these conditions, enforcement cannot begin.”
He added that the LIRS notices would have been stronger had they explicitly referenced the appeal and objection procedures that must be exhausted before a substitution notice can be issued.
Even where those legal thresholds are met, implementation may prove difficult, particularly for banks caught between tax authorities and financial regulators.
Akinjide Akande, a tax expert, said banks are primarily regulated by the Central Bank of Nigeria (CBN) and are obligated to safeguard customer deposits.
“Banks cannot remit customers’ funds to tax authorities on the strength of a tax notice alone,” Akande said. “At best, a temporary lien can be placed on the account pending further legal or regulatory direction.”
According to him, any direct transfer of funds without explicit CBN guidance could expose banks to legal liability.
“Until the CBN issues a formal position, banks are likely to proceed cautiously,” Akande said. “That uncertainty is where the real risk lies.”
Analysts say the situation exposes a potential fault line in Lagos’ tax enforcement strategy, where aggressive signalling by tax authorities may run ahead of the institutional and regulatory frameworks required for execution.
The tension between the LIRS and the banking sector highlights a systemic risk in Lagos’ tax enforcement. By moving ahead without a unified protocol involving the CBN, the LIRS risks creating a climate of legal uncertainty for both financial institutions and depositors.
As Akande suggested, the ‘real risk’ lies in this regulatory gray area. For the state’s tax recovery to be truly effective and legally sound, the LIRS must transition from public notices to formal inter-agency agreements. Without a clear ‘green light’ from the CBN, the power of substitution remains a potent threat on paper, but a logistical nightmare in practice.