Let’s first define the term “audit” before learning what a tax audit entails. The definition of “audit” in the dictionary says that it is an official examination of an organization’s financial records and the generation of a report, usually by an independent entity. It is also known as a thorough analysis or evaluation of anything.
Tax Audit Services
According to the Companies Act of 2013, there are numerous rules developed in India that regulate various audit types, such as an income tax audit, cost audit, stock audit, business audit, or statutory audit. An income tax audit determines whether a person or business properly filed their tax returns for the assessment year. The guidelines for an income tax audit are outlined in Section 44AB of the Income Tax Act of 1961.
The objective of an income tax audit does not require taxpayers who must have their accounts audited under any other law than Section 44AB of the Income Tax Act of 1961 to have their accounts reviewed.
The following are the other sections under Income Tax Act, 1961, which also lay down regulations related to income tax audit in India. These are presumptive taxation schemes, wherein a pre-determined percentage of income is assumed to be the gain or profit meant for taxation.
The following other sections under the Income Tax Act of 1961 also lay down regulations related to an income tax audit in India:
- Section 44BB: For Non-Resident Indians (NRIs) involved in business specialising in the mineral oils industry, like exploration
- Section 44BBB: International company involved in the business of civil construction etc. in certain power projects
- Section 44AD: Any business except those businesses mentioned under Section 44AE
- Section 44ADA: This section focuses on the regulations regarding income tax audits for eligible professionals
- *Section 44AE**: Businesses specialising in leasing, hiring and plying of goods carriages
What is Tax Audit?
The term “tax audit” describes the examination of the taxpayer’s financial records. In order to arrive at a conclusion regarding the assessor’s tax compliance activities, the auditor checks or examines the books.
When creating the books of accounts, the assesses must adhere to the requirements of the Income Tax Act of 1961, specifically Sections 28 through Section 44DB.
These sections’ provisions cover how to compute income, chargeability, and various allowances or disallowances for any business or profession that generates taxable income.
Objectives of tax audit
- To make sure the books of accounts are kept up to date, accurate, and certified by a tax auditor.
- Following a thorough review of the books of accounts, the tax auditor’s reporting observations and discrepancies are noted.
- To submit the required data, such as tax depreciation, compliance with different income tax law regulations, etc.
Who needs to get a Tax Audit Done?
Tax audit is compulsory for the following categories of taxpayers:
- A business owner, who has not opted for presumptive taxation scheme, with gross receipts or turnover or total sales exceeding Rs. 1 crore.
- A business owner, who has opted for presumptive taxation scheme under Section 44AD of the Income Tax Act, 1961, with gross receipts or turnover or total sales exceeding Rs. 2 crore.
- A taxpayer whose business, which is eligible for presumptive taxation under Section 44AE, 44BB and 44BBB, claims profits that are lesser than the prescribed limit under respective presumptive taxation scheme.
- A business owner who is not be eligible to claim presumptive taxation under Section 44AD because he or she has opted for it in a certain assessment year and not for any of the five consecutive years subsequently. This is applicable when his/her annual income is more than the maximum amount not chargeable to tax in the following 5 consecutive assessment years from the tax year.
- An employee of an organisation whose gross receipts is more than Rs. 50 lakhs
- An employee of an organisation that is eligible for presumptive taxation under Section 44ADA and claims profits that are lesser than the prescribed limit under presumptive taxation scheme and income is more than the maximum amount not chargeable to tax.
Steps to Conduct Tax Audit
The following is the procedure for filing tax audit report:
- The Chartered Accountant designated to conduct the tax audit of the person or business must use their official login credentials to submit the tax audit report online.
- Additionally, the taxpayer must provide in their login platform all pertinent details about their chartered accountant.
- The taxpayer must accept or reject the tax audit report on their login site after the auditor has posted it. The entire process must be repeated until the taxpayer accepts the tax audit report, in the event that the taxpayer rejects the report.
- Tax audit report has to be filed on or before the pre-determined due date of filing income return, i.e., 30th November of the subsequent assessment year for taxpayers who have engaged in an international transaction and 30th September of the subsequent assessment year for other taxpayers.
What is the Penalty for Non-compliance with Tax Audit?
Non-compliance of tax audit regulations by taxpayers attracts a penalty of whichever is lower from the following:
- 5% of total sales or
- Turnover or
- Gross receipts or
Only when a taxpayer can demonstrate a legitimate basis for non-compliance is a penalty waived. The assesses must pay a penalty in accordance with Section 271B of the Income Tax Act if the account books of a business or profession are not audited in accordance with Section 44AB. If the audit isn’t finished on time and the report isn’t submitted (before or on September 30), a penalty of 0.5% of the turnover, up to a maximum of Rs. 1.5 lakh, must be paid. A genuine reason for the delay or failure to file the audit report will not result in a penalty under Section 273B. Among the approved explanations are:
- Delay caused by resignation of the tax auditor
- Delay caused by death or physical inability of the partner responsible for accounts
- Delay caused by labour issues such as strikes or lock-outs
- Delay caused by loss of accounts due to theft or fire, or incidents that are not under the assesses control
- Natural calamities
Forms Required for Tax Audit
- Depending on the regulations under which the accounts have been audited, tax auditors can submit tax audit reports in one of two ways.
- Form 3CB and Form 3CD: Form 3CB and the required details must be provided in Form 3CD for tax audit reports submitted in accordance with Section 44AB of the Income Tax Act of 1961.
- Form 3CA and Form 3CD: The appropriate forms are Form 3CA and Form 3CD, respectively, when a taxpayer chooses to have the accounts audited in accordance with any law other than Section 44AB. The Form 3CD must contain the required information.
Who cannot be a tax auditor?
- Any member in part-time practice is not eligible to perform tax audit.
- A chartered account cannot audit the accounts of a person to whom he is indebted for more than Rs.10,000.
- A statutory auditor will be deemed to be guilty of professional misconduct if he/she accepts the appointment of Public Sector Undertaking/Government Company/Listed Company and other Public Company having turnover of Rs 50 crores or more in a year and accepts any other work, assignment or service in regard to the same undertaking/company on a remuneration which in total exceeds the fee payable for carrying out the statutory audit of the same undertaking/company.
- The Chartered Accountant who is assigned with the task of writing and maintaining the books of account of the assessee should not audit such accounts.
- The audit of accounts of a professional firm of Chartered Accountants cannot be performed by any partner or employee belonging to such firm.
- An internal auditor of the assessee cannot be appointed as a tax auditor.
- An auditor cannot accept more than 45 tax audit assignments in a particular financial year.
What should you do to be safe from a Tax Audit?
- Quote exact numbers and refrain from roundings
- File taxes on time
- Don’t report losses year-over-year
- Double-check your social security numbers
- Be updated with home office tax rebate rules