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A tax audit is an inspection or review of a company’s or an individual’s tax returns to determine the actual amount of income tax payable. Understanding the Auditing in India: Regulations, Forms, and Penalty for Income Tax Audit is critical since it is used to precisely compute the tax bills of people and corporations.
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Tax Audit Overview
The Indian government undertakes numerous audit under numerous laws, including such company audits/statutory audits conducted in accordance with business law rules, cost audits, stock audits, and so on. Similarly, Income Tax act has made ‘Tax Audit’ mandatory. During a tax audit, the accounting of a trade or business are scrutinised, which simplifies the process of calculating income for the purpose of filing a tax return.
The Income Tax Act makes tax audits on annual gross turnover/receipts mandatory if the total number exceeds a certain threshold. A tax audit is conducted by a Chartered Accountant, as described in Section 44AB of the Income Tax Act of 1961.
Tax auditing is simply an audit of tax-related matters.
Tax Audit Applicability
Section 44AB requires tax audits for the following individuals:
1 crore rupees for business
It signifies that an assesse must be audited in accordance with Section 44AB if his yearly gross revenue in business exceeds Rs 1 Crore.
Rs 50 lakh as a profession
It indicates that an assesse must undergo a tax audit under Section 44AB if his annual gross income from his occupation exceeds Rs50 lakh.
Presumptive Taxation Scheme-Section 44AD
- This scheme is suited for businesses with an annual revenue of less than Rs 2 crore.
- It really isn’t essential to keep accounting information. U/s 44AD
- Net income is projected to equal at least 8% of total revenue.
- Gross receipts are received through a digital means of payment.
- Total income is calculated as 6% and 8% of gross revenue, respectively.
- If an assessee wishes for Presumptive tax under Section 44AD, he must pursue the very same sections of auditing for the next five fiscal years.
- To take advantage of such schemes, one must submit ITR 4.
Presumptive Taxation Scheme- Section 44ADA
- This scheme is suitable for professions with an annual gross revenue of less than Rs 50 lakhs.
- Section 44ADA does not require the keeping of books of accounts.
- Your net income is calculated at 50% of your gross revenue.
- If an assessee opts for Presumptive taxes under Section 44ADA, he must audit under the same section for the next five years.
What should you do to be safe from a Tax Audit?
The objective of participating in any type of company or professional activity is to make money. It’s also essential to remember how profits should be made in a lawful and ethical manner. Perform the following activities to ensure a successful tax audit:
- The Income Tax Act mandates the keeping of books of accounts.
- Under Chapter IV, it is essential to calculate profit or gain.
- Is your income taxed or is your loss allowable?
- Taxable income and allowed loss are listed in the tax return file.
Type of Accounts Come Under Tax Audit
- Individual/Proprietorship
- Hindu Undivided Family
- Company
- Partnership Firm
- Association of Person
- Local Authority
What is included in Turnover for Tax Audit?
- Tax penalties received upon export sale are included in a financial year’s Turnover.
- Revenue obtained via money lender interest or currency fluctuation income unlike an exporter is counted as part of turnover in a financial year, as this is advance collected and forfeit from clients, and if excise duty was included in the turnover, this should be debited with in balance sheet.
What is excluded in Turnover for Tax Audit?
- Sale or Purchase of Fixed Assets
- Income raised from selling the assets held as investment
- Rental Income
- Residential or commercial Property
- Interest income and reimbursement of expenses as receipt.
- It ensures that accounting records are kept properly and effectively, and that they are verified by tax auditor.
- Following the rigorous examination of account books, a tax auditor must report any observations or irregularities.
- The primary goal of an auditing is to generate a report in line with the specifications of forms 3CA/3CB and 3CD. Aside from the reporting requirements of the preceding forms, an appropriate tax audits is also required to ensure that the taxpayer's book of accounts are properly maintained and fairly reflect the taxpayer's revenue and suitable claim for reductions.
- Annual auditing is a time-consuming and costly exercise. Every qualifying assessee must undergo a tax audit. It is now required by the Income Tax Act. Tax audits are carried out in India by tax consultants (Chartered Accountants).
- A tax audit might be economically beneficial for a business.
- An audit adds credence to data provided to employees, consumers, vendors, shareholders, and tax authorities.
- The audit ensures stakeholders that the statistics in the reports are truthful and fair.
- A tax audit aids in the development of a business brand.
What Constitutes Audit Report?
The tax auditor submits his report in the appropriate form, which could be Form 3CA or Form 3CB, in which:
- Form 3CA is used when a person in business or profession is already required to have his accounts audited under another law.
- Form 3CB is used when a person in business or profession does not need his accounts audited under any other law.
How and when tax audit report shall be furnished?
Using his login credentials, the tax auditor files his tax audit report online. It is critical for taxpayers to enter their CA information into their login account. When the auditor files the audit report, the taxpayer should accept or reject it via their login portal. If the report is refused for any reason, all stages must be repeated until the report is accepted by the taxpayer.
Due date by which a taxpayer should get his accounts audited
Any person/persons covered by section 44AB must have their accounts audited and receive the audit reports on or by September 30th of that year, i.e. the due date for filing the income tax return.
Types of Tax Audit
- The first sort of audit is referred to as correspondence audit. It is presumed among most basic like all sorts of audits. During this audit, the IRS will send a letter & ask you for information about a specific area of your tax return.
- The office audit is the second sort of audit. Under this study review, the auditor will ask several detailed inquiries and will most likely spend your entire day; but, if such IRS needs it, they will give you additional time to gather and submit required details.
- A field audit is a regular pattern of audit that is considerably more thorough than an official audits. In this form of audit, the IRS pays a visit to the taxpayer's home or place of business.
Penalty of non filing or delay in filing tax audit report
If a taxpayer fails to get their tax audit completed, they will face the following penalties:
- 0.5% of all sales, turnover, or gross receipts
- Rs 150,000
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