What is tax audit, how does it affect tax department and the tax payers

Are you aware of Tax audit ? If not, this is the best platform to understand it. Literal meaning refers to inspection or review. Be it a businessman or professional, taxpayers in India need to get the tax review done in accordance with the Income tax law. It is done to verify the correctness and fairness of the financial records of the assessee.

Another purpose is to make sure that the taxpayer should be maintaining financial evidence. Financial evidence includes balance sheets, income statement, account book, cash statement flow etc.

Income tax audit is defined under section 44AB .It gives the description of the different categories of taxpayers who are mandated to get their records assessed. Chartered Accountant conducts the investigation. He checks all the compliances and provisions as per Income –tax law. Post review, he needs to submit a tax audit report based on his assessment and findings.

Now, how would you know if you fall in tax audit limit? Under section 44AB, following candidates have to mandatorily get their account statements assessed-

  • Businessman whose total sales, gross receipts or annual turnover exceeds Rs1 Crore.
  • Professional, if his annual gross income exceeds Rs 50 lakhs.
  • Individual eligible for presumptive taxation scheme under section 44AD, 44AF, 44AE, 44BB, and 44BBB but claiming business gross profits lesser than mentioned profit as per above sections.

FY 2013-2014 onwards, tax audit efiling has been set as a mandatory activity. Chartered accountants are required to prepare tax review report in electronic format. Following forms are required for filing report –

  • Form 3CA & 3CD : Used when individuals financial statements are already assessed under any law
  • Form 3CB & 3CD : Cases where assessee financial records are not assessed under any other law.

As per section 271B, all individuals eligible in accordance with section 44AB are levied a penalty if they fail to get their financial books inspected on or before the due date. Assessment officer will levy penalty (either of the lower amount)-

  • Half of the total sales in case of businessman for the assessment year
  • 5% of a professional’s gross income for the assessment year.
  • A fixed amount of Rs1, 50,000.

Exceptions to income tax scrutiny penalty are decided in section 273B for ‘reasonable causes’. Reasonable clauses can be any of the following –

  • The death of accounts heads
  • Damage or loss of financial evidence in the case of fire, theft etc.
  • Resignation of  Income Tax Auditor
  • Cases involving natural calamities
  • Labour strike

Tax department also ensures proper evaluation of the assessee. The government has appointed chartered accountants with required skills to evaluate tax accurately. Correct report by CA’s also saves the time of the Assessing officer. It helps the government to keep a check against fraudulent cases.

Hence, if you are eligible for tax assessment, do maintain all your records. The last date for tax audit efiling is 30thSeptember of the assessment year. If you are missing relevant documentation, you should request for duplicates. Chartered accountants won’t accept the excuse for missing or lost evidence.

You can contact the tax advisor who prepared income tax efiling. He or she can explain the complete process and help you prepare. If you still have doubts about the review or have a field auditor visit, it’s a good idea to hire a professional tax expert.