Explaining the Power of Substitution: How LIRS plans to recover your unpaid taxes from banks, debtors, employers, others
The Lagos State Internal Revenue Service (LIRS) has issued a public notice clarifying its legal power to collect unpaid taxes directly from third parties who hold or owe money to tax defaulters. Here’s what you need to know about this enforcement mechanism.
What is the “Power of substitution”
The Power of Substitution is a legal collection tool that allows Tax services bypass a non-compliant taxpayer and collect outstanding taxes directly from anyone who holds money for them or owes them money. This authority is granted under Section 60 of the Nigeria Tax Administration Act 2025 (NTAA 2025).
When can LIRS use this power?
LIRS can invoke this power when a taxpayer fails, neglects, or refuses to pay an established tax debt after it becomes due. Outstanding taxes can include Personal Income Tax, Capital Gains Tax, Stamp Duty, and Withholding Tax.
LIRS can direct payment from a wide range of third parties, including: Banks and financial institutions holding account balances, employers who owe you salary or benefits, tenants who owe you rent, business partners or customers who owe you money for goods or services, agents acting on your behalf, debtors who have borrowed money from you, and anyone else holding funds that belong to you, whether the debt is currently due or still accumulating.
How does the process work?
When LIRS identifies unpaid taxes, it can issue a substitution notice to any third party connected to the defaulting taxpayer. Once this notice is received, the third party is legally required to remit the specified amount to LIRS from funds they hold or owe to the taxpayer. The tax authority considers the liability paid to the extent of whatever is remitted through this process.
What are third parties required to do?
Banks and financial institutions must remit the stated amount immediately and confirm the LIRS e-Tax platform at www.etax.lirs.net. They must also report the taxpayer’s available account balances and any restrictions on those funds.
Employers, tenants, agents, and other parties must withhold the specified amounts from payments due to the taxpayer and remit them to LIRS within the timeframe stated in the notice.
If someone receives a substitution notice but doesn’t actually hold or owe money to the taxpayer, they must inform LIRS in writing within the stipulated period.
Can this action be challenged?
Yes. Recipients of a substitution notice can file a written objection to the assessment within 30 days of receiving the notice, following the appeal provisions in the law. However, enforcement may proceed while appeals are being considered.
What happens if third parties don’t comply?
Failure to comply with a substitution directive can result in serious consequences, including liability for the full tax amount specified in the notice, additional penalties and interest, enforcement actions such as asset seizure, and possible criminal prosecution.
What does this mean for taxpayers?
Even if LIRS recovers some tax through substitution, taxpayers remain responsible for any unpaid balance. The tax authority is urging defaulters to settle their outstanding assessments promptly to avoid these enforcement measures and additional penalties.
This enforcement gives Lagos tax authorities significant reach in collecting unpaid taxes. If you have outstanding tax liabilities, LIRS can essentially freeze your income by intercepting money before it reaches you. The message is clear: settle your tax obligations directly with LIRS before they pursue collection through your financial network.
