In recent years, banking analysis for taxation has become one of the most talked-about methods used by the Kenya Revenue Authority (KRA) when assessing whether taxpayers have accurately declared their income. This modern approach is disrupting the traditional audit model and reshaping tax compliance expectations for individuals and businesses.

Understanding the Legal Foundations

Before diving into how banking analysis works, it’s important to understand the legal framework behind it.

1. Section 23 — Your Record-Keeping Duty

Under Section 23 of the Tax Procedures Act, every taxpayer must maintain proper records for at least five years from the end of each accounting period.
These records serve as proof of your financial activity — and ultimately, your declared taxable income.

2. Section 31 — KRA’s Power to Intervene

Section 31 empowers KRA to step in whenever there is evidence of income under-declaration, provided they have sufficient supporting documentation.
In today’s world, bank statements are becoming one of the strongest pieces of such documentation.

Why Banking Analysis Is Gaining Momentum

Traditionally, tax audits relied on:

• Ledgers
• Trial balances
• Cashbooks
• Audited financial statements

This method has gained traction because bank deposits are viewed as objective, third-party verified evidence of a taxpayer’s financial activity.

How Banking Analysis Works in Practice

Here’s the typical flow:

1. KRA obtains and reviews your bank statements.
2. All bank credits (money coming into the account) are analyzed.
3. KRA adjusts for obvious non-income items such as transfers.
4. Any unexplained deposits are treated as income unless proven otherwise.
5. An assessment is issued for what KRA considers undeclared taxable income.

This puts serious weight on the accuracy of your documentation.

The Big Legal Question: Who Has the Burden of Proof?

One of the major legal themes emerging from Tribunal and High Court decisions is the concept of burden of proof.

When KRA points to certain deposits as undeclared income, the burden shifts to the taxpayer to demonstrate that the money:

• Is not income, or
• Is income exempt under Section 3 of the Income Tax Act

Examples include loans, internal transfers, reimbursements, capital injections, and other non-taxable receipts.

If you cannot provide documentation, KRA will likely treat those deposits as taxable.

Common Scenarios Where Taxpayers Get Exposed

Banking analysis for taxation often flags these situations:

• Personal bank accounts used for business transactions
• Transfers without supporting schedules
• Loan proceeds without agreements
• Capital injections lacking board resolutions or CR12 correspondence
• Mobile money deposits not reflected in books
• Cash deposits with no audit trail

These are the very moments KRA uses to argue under-declaration.

What Taxpayers Must Do to Protect Themselves

To avoid unnecessary assessments, taxpayers should maintain clear evidence of:

• Loan agreements
• Internal fund transfer schedules
• MPesa-to-bank reconciliations
• Receipts and invoices supporting business transactions
• Funding letters for capital injections
• Proof of refunds or customer reversals

Good documentation is no longer a formality — it’s a shield.

Why Banking Analysis Is Here to Stay

The rise in banking analysis-related disputes at the Tax Appeals Tribunal and the High Court shows that this method is reshaping Kenya’s tax landscape.

And realistically, as banking data becomes more integrated with tax systems, this approach will only become more refined and more widely used.

Final Takeaway

Your bank account now speaks louder than your financial statements.

As banking analysis for taxation continues to evolve, taxpayers must be proactive, organized, and fully prepared to justify every deposit.
Strong record-keeping isn’t just compliance — it’s protection.

Written by Orina Dancan