The main problem facing tax authorities in any jurisdiction lies in persuading all tax payers to comply with obligations put on them by any tax system. Tax is an important stream of revenue for government’s development projects and therefore all efforts must be made by governments to ensure that it is accurately and efficiently collected so as to facilitate the government’s operations. Unfortunately, Kenya Revenue Authority does not collect all the taxes that it ought to. This is attributed to high levels of tax noncompliance. In Kenya, the biggest block of taxpayers on the business sector were Small and Medium Enterprises (SMEs) which were estimated to contribute about 45% of GDP in Kenya and they account for 85% of employment statistics. This study intended to identify the factors that influence tax compliance, specifically focusing on SME’s operating in Nakuru CBD. Small businesses played an important role in the tax system as it was the fastest growing sector in the Kenyan economy however non-compliance to the National tax system and County government tax systems continued to plague the sector. Guiding specific objectives were to determine; effects of tax education and knowledge, compliance costs, perceived opportunities to evade taxes and the penalties and fines imposed by tax authorities and how they affect tax compliance levels. To achieve the objectives, the study employed a survey design approach. A sample size of 212 SMES was picked as a representative of the population of 3506 licensed SMEs operating within the Nakuru CBD. To ensure that various diverse categories of taxpayers and business entities were included in the survey, stratified sampling technique was adopted. The data collection instruments were self-administered structured questionnaires. Data collected was analyzed using descriptive and inferential statistics with the aid of SPSS package. The findings of the study revealed that perceived opportunity for tax evasion has no statistically significant effect on tax compliance among SMEs ( =106.873, Prob> =0.254). There exist a statistically insignificant, negative relationship betweenperceived opportunity for tax evasion and tax compliance (rho= -0.026; p>0.05). Tax knowledge and education has no statistically significant effect on tax compliance among SMEs ( =90.735, Prob> =0.838), while there exist statistically insignificant, negative relationship betweentax knowledge/education and tax compliance (rho= -0.031; p>0.05). It was established that fines and penalties has statistically significant effect on tax compliance among SMEs ( = 131.098, Prob> =0.043), while there exist statistically insignificant, negative relationship betweenfines/penalties and tax compliance (rho= -0.038, p>0.05). It was proved that tax compliance cost has no statistically significant effect on tax compliance among SMEs ( =110.474, Prob> =0.183). There exist a statistically insignificant, negative relationship betweenperceived opportunity for tax evasion and tax compliance (rho= 0.024; p>0.05). It is recommended that The Kenya revenue authority should ensure revenue streams are tracked by involving financial institutions since majority as well as enhance its manpower to ensure monitoring and tracking of all income reported by SME operators.
