The Lagos State Internal Revenue Service (LIRS) has announced plans to begin enforcing its statutory power of substitution to recover outstanding tax liabilities directly from banks and other third parties connected to defaulting taxpayers.
The disclosure was made in a public notice issued by the agency, citing Section 60 of the Nigeria Tax Administration Act (NTAA) 2025, which empowers tax authorities to recover unpaid taxes through third-party deductions where liabilities have become final and remain unpaid.
The move comes amid the ongoing implementation of the NTAA by the federal government, despite public controversies surrounding alleged alterations to portions of the law in the gazetted version.
What LIRS is saying
According to LIRS, the power of substitution allows tax authorities to legally redirect funds belonging to a taxpayer—held by third parties—towards settling unpaid tax obligations.
Under Section 60 of the NTAA 2025, where a taxpayer fails to pay an assessed and final tax liability when due, LIRS may issue a substitution notice to any third party holding funds on behalf of that taxpayer or owing money to them.
“The Power of Substitution is a lawful collection mechanism designed to ensure efficient recovery of unpaid taxes, including Personal Income Tax (PIT), Capital Gains Tax (CGT), Stamp Duties, and Withholding Tax (WHT) administered by LIRS,” the agency stated.
LIRS emphasized that the provision applies strictly to established tax liabilities that are final, due, and unpaid, and is not intended for disputed or unresolved assessments.
How the substitution process works
The tax authority explained that substitution notices may be issued where a taxpayer neglects or refuses to settle a confirmed tax obligation. Once invoked, LIRS may serve notices on a broad range of third parties linked to the taxpayer, including:
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Banks and other financial institutions holding the taxpayer’s funds
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Employers, tenants, customers, agents, or business partners
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Debtors or entities owing money to the taxpayer, whether immediately payable or expected to accrue
Upon receipt of a substitution notice, the affected third party is legally required to remit the specified amount to LIRS from funds belonging to or payable to the taxpayer. Any amount paid under this directive is deemed to have settled the taxpayer’s liability to the extent of the remittance.
Obligations on banks and financial institutions
LIRS placed particular emphasis on the responsibilities of banks and financial institutions, warning that compliance with substitution notices is mandatory under the law.
According to the notice:
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Banks must remit the stated amount to LIRS without delay once a substitution notice is received
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Compliance must be confirmed through the LIRS e-Tax platform
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Financial institutions may be required to disclose account balances and any existing encumbrances on the taxpayer’s accounts
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Failure to comply with a substitution directive constitutes an offence under the NTAA 2025
The Service stressed that substitution notices are legally binding and must be treated as enforceable directives, not discretionary requests.
Why this matters
The enforcement action signals a tougher stance by Lagos State on tax compliance, particularly as Nigeria rolls out a restructured tax administration framework aimed at improving revenue collection and reducing leakages.
The power of substitution significantly strengthens the ability of tax authorities to recover unpaid taxes without prolonged litigation, especially where funds are readily traceable through banks or commercial relationships.
What you should know
The move comes as the federal government begins implementing four major tax reform laws, which took effect in January 2026. These include:
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The Nigerian Revenue Service Establishment Act
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The Joint Revenue Service Establishment Act (effective June 26, 2025)
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The Nigerian Tax Act (NTA)
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The Nigerian Tax Administration Act (NTAA)
The NTAA provides a unified legal framework for tax administration across federal and state authorities, introducing standardized enforcement mechanisms—such as the power of substitution—now being activated by LIRS.
For individuals and businesses operating in Lagos, the announcement underscores the importance of settling tax obligations promptly, as unpaid liabilities may now be recovered directly from bank accounts, employers, customers, or other third parties without further warning.
Emmanuel Bassey is a Financial Expert that has worked in the Banking and Finance Industry for over 15+ years across different banks in Nigeria
