Income Tax Audit
A Tax Audit is an evaluation of total tax return to check whether income and deductions are correct. Tax Audit is a mandatory audit under the Income Tax Act.
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What is Income TAX Audit?
An audit simply means inspection, a review or check, so tax audit is when a filed tax is under review. A tax audit happens when an IRS decides that your tax is to be examined closely and to be verified weather your income and its deductions are accurate. Typically a tax return comes under tax audit when something entered by you is out of the ordinary.
When a TAX Audit is Applicable?
It is applicable when your business turnover exceeds ₹100 lakh in a financial year. Or when you are simply a professional and your gross receipts in your profession goes beyond ₹25 lakhs in a financial year.
What should You do to be Safe from a Tax Audit?
A business or profession is carried out with a motive in mind for financial profits. And it is important to keep in mind that they should be appropriate profits without any suspicious record-less reports. So what you can do is the following:-
- Maintenance of accounts book which is mandatory as per the income tax act in India.
- Profit or gain should be computed which are computable under Chapter IV.
- Income is Taxable or Loss allowable under act of India.
- Show taxable income and allowable loss in tax return file.
What Type of Accounts Come under Tax Audit?
- Individual/Proprietorship.
- HUF.(Hindu undivided family)
- Company.
- Partnership Firm.
- Association of person.
- Local Authority.
What is Included in Turnover for TAX Audit?
Duty drawback received on export sales shall be considered as part of Turnover in a financial year. Income made out of interests from income by money lender or through Foreign fluctuation income by an exporter shall be considered as part of turnover in a financial year or Advance received & forfeited from customers and if excise duty included in turnover it should be again debited in the profit and loss account.
Things that are Excluded in Turnover for TAX Audit?
Sale/ Purchase of Fixed Assets, Sale Proceeds of the Assets Held as Investments, Rental Income, residential or commercial property, Interest income and Reimbursement of expenses as receipt.
What is the Objective of Tax Audit?
One of the main objectives of tax audit is to derive a report as per the requirements of form no. 3CA/3CB and 3CD. Apart from reporting requirements of the above forms a proper tax audit for tax purposes will ensure that the accounts book and records are properly maintained as they truly reflect the income of the tax payer and appropriate claim for deductions in his overall tax made by him/her. Such tax audits would also in the review of fraud activities. It can also facilitate administration of the laws of tax audit by proper presentation of the involved accounts right before any income tax authorities and also considerably save the time and energy of the officer assessing in carrying out the routine procedure of verification.
In India, annual audit seems time consuming process and expensive process to businessmen. Tax audit firms in India can verify performance of the business with industry standards.
For example if your business is setup in Delhi, then tax audit firm in Delhi can review your financials and they can also recommend ways to improve.
Tax audit is required to be conduct by every eligible assesses. It is compulsory under the Income Tax Act. Tax audit has to be conducted by the tax consultants in India (Chartered accountant only.)
How Many Types of Tax Audit are there?
There are four types of tax audits:-
- The first type of audit is correspondence audit, which is the simplest of all types of tax audits and involves an IRS to send letter to you requesting information specific to certain area of your tax return. Here IRS may have questions regarding some expense and might request you to send them receipts to provide evidence for your dedication.
- The second type of tax audit is office audit, here an auditor will have way more questions than in a simple letter about your return, generally will be more detailed and will probably take a day, and if IRS requires, they will give you more time to collect and send in necessary information.
- The third type is a field audit which is more comprehensive than office audit. Here IRS visits the tax payer at their house or their place of business/work. They may demand to see other things, they will not be limited to a particular item.
The fourth type of tax audit is (TCMP) tax payer compliance measurement program. The main purpose of this tax audit is to get an update of data for IRS DIF scores which are developed from the analysis of a larger group involving up to fifty thousand randomly picked returns conducted every few years.
Frequently Asked Questions
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 case of profession if the profession has total gross receipts of more than Rs. 50 lakhs, then it is mandatory to conduct tax audit by a Chartered Accountant.
There are types of tax audits are explained below:
• Field Audit: This type of audit is generally conducted in offices.
• Office Audit: This type of audit is conducted in an office and the concerned person must visit the office with necessary documents in a row.
• Corresponding Audit: In this type, the income tax office sends a letter requesting for documents which will provide clarity or missing information with regards to your tax returns.
• Financial audit: In this type of audit the authenticity of the information mentioned in the financial statements of the entities is analysed
• Construction audit: The main aim of this type of audit is to check whether the expenditures incurred in construction projects is reasonable.
During a tax audit, the auditor/ auditors may review your financial records, such as income statements, bank accounts, credit records, receipts, and monthly and annual expenditures.
• The tax audit limit for Businesses is Rs. 1 crore.
• The tax audit limit for profession is Rs. 50 lakhs.
• The tax audit limit for businesses for A.Y.2019-20 is Rs. 1 crore and Rs. 2 crore in case of person, who declares business profit according to the provisions of section 44AD (1)).
• The tax audit limit for professions for A.Y.2019-20 is Rs. 50 Lakhs.
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 fulfillment of other requirements of the Income-tax Law. The audit conducted by the chartered accountant of the accounts of the taxpayer in pursuance of the requirement of section 44AB is called tax audit.
The maximum number of tax audits that can be performed by a Chartered Accountant (CA) is limited to 60. In case of a firm the restriction on tax audit limit applies to each of the partners.
The primary aim of Tax Audit is to ensure that the books of Accounts have been maintained as per the provisions of the Income Tax Act. Tax Audit also assures that the Accounts are properly presented to the Assessing Officers.
• If any person fails to get audited his account before the due date, then the concerned person will be liable for a penalty of 1/2% of the turnover or the gross receipts up to a maximum penalty of Rs. 1, 50,000.
The following are the causes that prompt a tax audit:
• Having higher than average income
• Taking deductions that are disproportionate to the income
• Claiming of business losses every year.
• Taking irrelevant deductions
If there is any error in the books of accounts, generally it gets corrected by the CA. In case there is any mistake then penalty will be charged which may lead to paying of more tax amount.
Some of the examples of tax evasion are false tax returns and smuggling to fake documents and bribery.