Tax Audit: A General Summary

 Tax Audit can be defined as the process of examining tax-related matters.

India's authorities perform numerous audits that are governed by diverse legislations. These audits include but are not restricted to company audit/statutory audit conducted according to corporate law provisions, cost audit, and stock audit.

Moreover, under the Income Tax law, the authorities have made it mandatory to undertake a 'Tax Audit'. Such audits assess the accounting of businesses or professions and facilitate the calculation of income for tax return purposes.

Eligibility for Tax Audit

The individuals listed below are required to undergo a tax audit due to the regulations stated in Section 44AB.

The business has a net worth of Rs 1 Crore

• If an individual's yearly gross turnover in business exceeds Rs 1 Crore, they are obligated to undergo an audit as per the guidelines stated in Section 44AB.

An occupation that yields a salary of Rs 50 lakh

• In the event that an individual's yearly income in their occupation increases to Rs50 lakh or more, they must undergo a tax audit in accordance with Section 44AB.

  How can you safeguard yourself against a Tax Audit?

  The primary goal of engaging in business or professional endeavors is to make a financial gain, but it is important to note that the profit must be gained through lawful and ethical means. To ensure a favorable Tax Audit, execute the following tasks:

  • According to the Income Tax Act, maintaining books of accounts is compulsory for individuals.
  •  Computation of profit or gain under Chapter IV is crucial. The income is taxable or loss allowable in certain situations. The taxable income and allowable loss must be mentioned in the tax return when filing.

    Section 44AD - The Scheme of Presumptive Taxation

    • This scheme is intended for companies with an annual turnover of no more than Rs 2 crore.
    • There is no requirement to keep account books according to U/s 44AD. Your net profit is projected to be 8% of your gross turnover, which will be received through digital payment systems.
    • Net income is determined by applying a 6% or 8% rate to the total income earned.
    • Choosing to be taxed under section 44AD necessitates following the same audit regulations for the next five fiscal years.
    • Filing ITR 4 is a necessary step in order to participate in this program.

     Enforcement of Section 44ADA - the scheme for presumptive taxation

    • This scheme is applicable for occupations that earn a yearly gross income of less than Rs 50 Lakhs.
    • As per Section 44ADA, bookkeeping is not mandatory. Your net income is calculated at 50% of your total receipt.
    • Opting for presumptive taxation under Section 44ADA requires following the same audit procedure for the subsequent five fiscal years.

      Which Accounts Qualify for Tax Audit?

      The following are different categories of legal entities:

      • Sole Ownership/Entrepreneurship
      • Joint Familial Property
      • Corporation
      • Collaborative Entrepreneurial Venture
      • Group of Individuals
      • Municipal Government

      What components are factored into the Turnover for Tax Audit?

      In a fiscal year, duty drawback received following export sales is deemed a component of turnover.

      Along with this, any interest income earned via moneylenders, foreign fluctuation income acquired by an exporter, and any advances received and forfeited from customers are also considered as a part of the turnover. It's important to note that if excise duty is included in the turnover, it should be debited in the profit and loss account.

      What items are not considered in the calculation of Turnover for Tax Audit?

      ·         Buying and selling fixed assets,

      ·         Generating revenue from the sale of investment assets,

      ·         Receiving income from renting out residential or commercial property

      ·         Earning interest income and

      ·         Expense reimbursements are all sources of income.

      Purpose of Conducting Tax Audits
      •    The tax auditor must certify that the books of accounts are accurately maintained, and any discrepancies or observations must be reported. The primary objective of a tax audit is to produce a report as stipulated in form no. 3CA/3CB and 3CD, in addition to ensuring proper maintenance of records and book of accounts. This includes accuracy in reflecting the taxpayer's income and appropriate deductions.
      •    Conducting an annual tax audit is an essential process that requires time and financial investment. According to the Income Tax Act, every eligible assessee in India must undergo a tax audit, which is typically conducted by a Chartered Accountant. 
      •    Although it can be costly, a tax audit can ultimately benefit a business financially. Additionally, audits lend credibility to information published for various stakeholders, including employees, customers, suppliers, investors, and tax authorities. Furthermore, investors can rest assured that the figures reported in a company's accounts accurately reflect its financial status. 
      •    Finally, a tax audit can contribute to building a positive reputation for the company, which is crucial for its long-term success.

      How is an Audit Report Defined?
      The report of the tax auditor can be presented in either Form 3CA or Form 3CB, as per the prescribed format.
      •    If an individual engaged in a business or profession is required to have their accounts audited under a separate law, they must file Form No. 3CA. 
      •    Alternatively, if the individual is not obligated to have their accounts audited under any other law, they should file Form No. 3CB. Both forms are necessary based on the individual's circumstances.

      Different Kinds of Tax Audits
      Regarding a specific section of your tax return, there are three types of audits to be aware of. 

      •    The first is called an office audit. During this audit, the auditor will ask numerous detailed questions, which could possibly take up your entire day. If the IRS requires additional information, they may allow you more time to gather the necessary details. 
      •    The second type of audit is a field audit, which is more extensive than the office audit. The IRS will visit the taxpayer's home or workplace and may request to examine other items in addition to specific ones.
      •    The third category of audit is the field audit, which is more comprehensive than the office audit. In this type of IRS audit, the taxpayer's residence or workplace is visited by the auditor. The auditor may request to examine other documents in addition to the specific items specified.

      What is the requisite timing and method for submitting a tax audit report?

      In order to file a tax audit report, the tax auditor must log in using their unique credentials and submit the report online.

      For taxpayers, it is crucial to include the details of their CA when logging into the portal. Upon submission by the auditor, the report should be reviewed and either accepted or rejected by the taxpayer through their login.

      If the report is declined, the taxpayer must repeat all of the necessary procedures until it is approved.

      What is the deadline for an individual to have their financial records audited as required by tax law?

      To be in compliance with section 44AB regulations, individuals or entities must have their accounts audited and obtain the audit reports no later than September 30th of the same year as the deadline for filing their income tax returns.

      What are the consequences for failing to submit or delaying the submission of a tax audit report?

      The penalty levied on taxpayers who do not undergo tax audit as,

      • A sum of Rs 1,50,000 or 0.5% of the entire sales, turnover or gross receipts.