Overview of Tax Audit
Tax Audit refers to the verification and inspection of the accounts of the taxpayer to ensure that the accounts are in accordance with the provisions of the Income Tax Act 1961. The Government of India has made tax audits mandatory compliance for every taxpayer.
Income Tax Act 1961has made tax audit compulsory on the annual gross turnover/receipts if the amount exceeds a specified limit. Chartered Accountant conducts the tax audit defined in Section 44AB of the Income Tax Act, 1961
Applicability of Tax Audit
Section 44AB has made tax audit mandatory for the following persons:
If the annual gross turnover of an assessee exceeds one crore, then he shall be liable to undergo a the audit as per Section 44AB of the Income Tax Act.
When the Annual Gross Income in a profession exceeds Rs. 50 Lacs, then the Assessee is eligible for this procedure
Objectives of Tax Audit
The key objectives of the Tax audit are given below-
Types of Tax Audit
The types of Tax Audit are given below
It is the type of Audit that takes place at the taxpayer's office. The taxpayer needs to provide the Documents to the auditor.
This Audit takes place at the office of the IRS. The taxpayer needs to carry the required Documents. The taxpayer will be informed about the Documents through a letter from the IRS Office.
Here the IRS sends a letter requesting the taxpayer to provide the missing Documents or any other Documents which can provide clarity pertaining to the taxpayer's tax returns. The taxpayer is only required to mail the required Documents.
Type of Accounts Come Under Tax Audit
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Essential Documents Required for Tax audit
The following Documents are necessary for Tax Audit –
The procedure of Tax Audit
The following steps are involved in a Tax Audit:
The first step is the selection of a Tax auditor. The auditor can be the Chartered Accountant of the business or any official of the IRS office.
The next step is to file the required form and submit the essential Documents to the tax auditor.
After submitting the Documents, the auditor verifies all the essential details and verifies every Document submitted by the taxpayer. The auditor can also ask for additional Documents to get clarity about the transaction of the taxpayer.
After verifying all the Documents, the auditor finally prepares an audit report. The audit report act as proof of adherence to tax laws by the taxpayer.
Presumptive Taxation Scheme Under Section 44AD
Presumptive Taxation Scheme- Section 44ADA
Tips to be safe from a Tax Audit
The motive behind indulging in any business or professional activity is to earn financial profit. And it is crucial to remember that profit should be earned legally and appropriately. Perform the following activities that will result in a healthy Tax Audit:
What is included in Turnover for Tax Audit?
What is excluded in Turnover for Tax Audit?
Constituents of a Tax Audit Report
The tax auditor presents his report in the specified form, which could be either Form 3CA or Form 3CB, where:
The Due date for Tax Audit
It is necessary for any person/persons who is/are covered under section 44AB to get their accounts audited and also obtain the audit reports on or before 30th September of that particular year, i.e., the due date of filing the return of the income.
Penalty of non-filing or delay in filing Tax Audit report
If any taxpayer fails to get the tax audit done is punished with the following penalty:
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Why Corpbiz?
We at Corpbiz have trained professionals to help you throughout the Tax Audit procedure. Our Experts will guide and assist you in the whole process of Audit and related services & also ensures the timely and effective completion of your work. For any queries related to Tax Audit and related services, feel free to contact our experienced and trained professionals at Corpbiz.
Frequently Asked Questions
Limit of tax audits:
- The limit for Businesses is Rs. 10 crore.
- The limit for profession is Rs. 50 lakhs.
The maximum number of tax audits that can be performed by a Chartered Accountant (CA) is limited to 60. In the case of a firm, the restriction on tax audit limit applies to each of the partners.
The primary aim is to ensure that the books of accounts have been maintained as per the provisions of the Income Tax Act. It also assures that the Accounts are properly presented to the Assessing Officers.
The following are the causes that prompt a tax audit:
- Having higher than average income
- Taking deductions that are disproportionate to the income
- Claiming business losses every year.
- Taking irrelevant deductions
If there is an error in the books of accounts, generally, it gets corrected by the CA. In case there is any mistake, then a penalty will be charged which may lead to paying more tax amount.
Some examples of tax evasion are false tax returns, smuggling to fake Documents, and bribery.
While auditing if you do not have any receipt, the auditor may accept any other paper works and in case you fail to present the same, the auditor will not accept the entry in the books of accounts.
Section 44AB gives the provisions relating to the class of taxpayers like businesses or professions or self employed persons who are required to get their accounts audited from a Chartered Accountant. The Audit under section 44AB aims to ascertain the compliance of various provisions of the Income-tax Law and the fulfilment of other requirements of the Income-tax Law. The Audit conducted by the chartered accountant of the taxpayer accounts in pursuance of the requirement of section 44AB is called a tax audit.
Types of accounts that come under tax audit:
- Individual/Proprietorship
- Hindu Undivided Family
- Company
- Partnership Firm
- Association of Person
- Local Authority
Any business having a total sales turnover of over Rs. 1 crore must complete a compulsory tax audit by a Chartered Accountant (CA). And in the case of the profession, if the profession has total gross receipts of more than Rs. 50 lakhs, then it is mandatory to conduct a tax audit by a Chartered Accountant.
In case of loss, since there is no income, therefore it does not exceed the maximum amount not chargeable to tax, and so the second condition mandating the audit u/s 44AB r/w section 44AD is not satisfied, and therefore the Assessee is not required to get the accounts audited u/s 44AB.
An audit, which is required by the statute (law), is known as a statutory audit. A tax Audit is a compulsory audit under Income Tax Act 1961 if the turnover of the assesses reaches the specified limit. Statutory Audit is performed by external auditors, whereas tax audit is conducted by a practising Chartered Accountant.
Objective of a tax audit
- It ensures that books of accounts are maintained properly and correctly and certified by the tax auditor.
- Once methodical verification of books of accounts is done, it is necessary to report observations or discrepancies observed by the tax auditor.
- It can prove financially beneficial for a business.
- An audit gives credibility to a piece of information published for employees, customers, suppliers, investors, and tax authorities.
The lists of activities that will result in a healthy tax audit:
- Income Tax Act has made it mandatory to maintain books of accounts
- It is necessary to compute profit or gain under Chapter IV
- Income is taxable or loss allowable.
- In tax return file mention show taxable income and allowable loss
The tax auditor presents his report in the specified form, which could be either Form 3CA or Form 3CB, where:
- Form No. 3CA is presented when a person involved in business or profession is already mandated to get his accounts audited under any other law
- Form No. 3CB is presented when a person is involved in business or profession does not need to get his accounts audited under any other law.