Tax Audit

There are various types of audits carried out under various regulations, such as company audits/statutory audits carried out under company law provisions, expense audits, stock audits, and so on. Similarly, income tax law requires an investigation such as a ‘Tax Audit.’ Tax audit, as the term implies, is an inspection or analysis of the finances of any company or occupation carried out by taxpayers from an income tax standpoint. It simplifies the method of calculating taxes to file income tax returns.

Income Tax Act Objectives

The primary goal of an income tax audit is to ensure that the taxpayer follows the income tax laws and regulations throughout the fiscal year. The taxpayer’s purchases to Receipts, expenses, loans, exemptions, and so forth are all following the provisions. Other goals include the following:

  • Forms 3CA/3CB and 3CD specifications must be determined/derived/reported.
  • A thorough tax audit will ensure that the books of account and other documents are kept correctly.
  • The taxpayer’s books of account accurately represent his revenue, and he correctly claims deductions.
  • Ensure the proper upkeep and accuracy of the books of accounts.
  • An inspector certifies the books of records.
  • A note to the income tax department of discrepancies/observations made by the tax auditor during the review of books of accounts.
  • A search for the taxpayer’s deception and malpractice in reporting income tax returns.
  • Reporting of critical data such as depreciation and advances, allowances, and compliance with income tax act provisions. This information benefits the income tax department in two areas. To begin, a proper accounting presentation before tax authorities can make it easier to administer tax laws. Second, net revenue, spending, and deduction claims must be calculated and checked.
  • Save Assessing Officers’ time by automating repetitive verifications such as testing the accuracy of totals and determining if transactions and sales are correctly vouched for. The time saved by the Assessing Officers could be used to contribute to more critical and investigative facets of a crime. ​

Non-Compliance Penalty under Income Tax section 44AB

If a taxpayer fails to comply with tax audit requirements, he or she must pay the required penalty. According to Section 271B of the Income Tax Act, the liability would be the least of the following:

  • Rs 1,50,000
  • 0.5% of the total sales, turnover, or gross receipts

The income tax agency, on the other hand, waives the liability if the taxpayer demonstrates a legitimate excuse for noncompliance. The below are some of the legitimate grounds for which a penalty waiver can be granted:

  • Due to the retirement of the tax auditor, there has been a delay.
  • Delay caused by the death or physical incapacity of the partner in charge of accounts
  • Natural disasters
  • Labor problems, such as protests or lockouts, trigger delays.
  • Delay caused by account loss due to burglary or arson, or accidents outside the assessee’s jurisdiction

Applicability of Income Tax Audit under Section 44AB

If a taxpayer’s revenue, turnover, or gross receipts surpass Rs 1 crore in a fiscal year, he or she shall undergo a tax audit of his or her books of accounts.

The Rs 1 crore threshold cap is proposed to be raised to Rs 5 crore with effect from AY 2020-21 (FY 2019-20). The taxpayer’s cash receipts and payments are subject to the following condition:

  • Cash receipts are limited to 5% of gross receipts turnover
  • Cash payments are limited to 5% of aggregate payments

In such cases, a taxpayer can be required to comply with tax audit requirements.

Income Tax Audit Report Due Date

The report’s due date is determined by the due date of the income tax return. The declaration must be filed on or before the due date of the taxpayer’s income tax return. For taxpayers who partake in an overseas trade within the fiscal year, the ITR filing deadline is November 30th of the next appraisal year. For all taxpayers, the filing deadline is September 30th of the following appraisal year. 

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Income Tax Audit under Section 44AB – FAQs

Q1. What is the Income Tax Audit limit?

Section 44AB of the Income Tax Act of 1961 requires any person carrying on business to have his books of accounts audited if his gross receipts/turnover exceeds 1 crore during the year (the threshold limit is 2 crore in the case of presumptive taxation u/s 44AD).

Q2. When is the tax audit date?

Section 44AB Income Tax Audit – Criteria, Audit Report, Penalty Individual taxpayers have until December 31, 2020, to file their income tax returns (ITRs) for the fiscal year 2020-21. The deadline for audits, transfer pricing proceedings, and other taxpayers have been extended to January 31, 2021.

Q3. What does tax audit mean?

A tax audit is an IRS review of your tax return to ensure that your income and deductions are right. A tax audit occurs anytime the IRS wishes to review your tax return more carefully to ensure that your taxes and deductions are right.

Q4. Under Section 44AB, who is subject to a tax audit?

According to Section 44AB, the following individuals are expected to have their accounts audited: If a person’s net revenue, turnover, or gross receipts (as the case may be) in the company for the year meet or exceed Rs. 1 crore, he is considered to be in business.

Q5. What constitutes an audit report?

Form No. 3CA is furnished when a person carrying on business or career is already required to have his accounts audited under some other law, when a person carrying on business or profession is already mandated to have his accounts audited under some other legislation, and where a person carrying on a company or occupation is not allowed by statute to have his accounts audited.