Know in detail about all the tax audit features: eligibility, process, compliance. Learn to handle audits efficiently without any delays. Get expert attention.
The term ‘tax audit’ refers to a formal examination conducted by federal or state tax authorities to verify a taxpayer’s compliance with tax laws. For instance, the IT department reviews tax returns to ensure correct tax payment. When chosen for an audit, the IT department notifies individuals through mail, specifying whether it will be conducted in person or remotely. The letter provides instructions and outlines the required details for verification, such as income, expenses, and deductions. Let’s explore features of tax audit in this blog.
What is a Tax Audit?
Tax audits come in various forms, conducted under different legal frameworks like statutory audits for companies under corporate laws, cost audits, stock audits, and more. Similarly, within the realm of income tax, there exists a specific type of audit known as a ‘Tax Audit’. As the name implies, a tax audit is a systematic review and examination of the financial accounts of a business or profession, conducted by taxpayers themselves, with a focus on income tax compliance. This audit simplifies the process of income calculation for the purpose of filing income tax returns.
Features Of Tax Audit
These features of tax audit collectively contribute to the effectiveness and importance of tax audits in India’s taxation system.
- Mandatory Thresholds: Tax audits are typically mandatory for businesses and professionals if their turnover or gross receipts exceed specified thresholds
- Compliance Check: Tax audits ensure compliance with the Income Tax Act and other tax laws
- Reporting: Tax auditors prepare and submit audit reports, including Form 3CA, Form 3CB, and Form 3CD, as required by tax authorities
- Financial Scrutiny: Auditors review financial records, statements, and transactions to verify their accuracy
- Documentation: Proper record-keeping and documentation of financial transactions are essential for a successful tax audit
- Presumptive Taxation: Tax audits apply to businesses opting for presumptive taxation schemes if their income exceeds the prescribed limits
- Disclosure: Taxpayers must disclose relevant financial information and comply with disclosure requirements
- Audit Remarks: Auditors provide audit remarks and observations on financial matters
- Penalty Avoidance: Timely and accurate tax audit filings help taxpayers avoid penalties and legal issues
- Statutory Compliances: Tax audits ensure adherence to statutory compliances and tax regulations
- Professional Assistance: Many taxpayers seek the assistance of chartered accountants or tax professionals to conduct tax audits
- Scope: Tax audits encompass a wide range of financial aspects, including income, deductions, and expenditures
- Revised Thresholds: Threshold limits for tax audits may change based on amendments in tax laws
- Exemptions: Some taxpayers, like those in specified professions, may be exempt from tax audits below certain income levels
- Electronic Filing: Tax audit reports are often filed electronically through online portals
Presumptive Taxation Schemes Under Section 44AD and Section 44ADA
Under Section 44AD
- Businesses with an annual turnover up to Rs 2 crore are eligible for this scheme
- Maintenance of detailed books of accounts is not mandatory under Section 44AD
- The net income is presumed to be 8% of your gross turnover
- Receipts should primarily be through digital payment methods
- Net income can be calculated either at 6% or 8% of gross receipts
- If an assessee opts for presumptive taxation under Section 44AD, they must continue to follow this audit section for the next five financial years
- To avail of this scheme, taxpayers need to file ITR 4.
Under Section 44ADA:
- Professions with an annual gross income not exceeding ₹50 lakhs are eligible for this scheme
- Detailed bookkeeping is not required under Section 44ADA
- The net income is estimated at 50% of the taxpayer’s gross receipts
- If a taxpayer chooses presumptive taxation under Section 44ADA, they must adhere to this audit section for the subsequent five financial years.
Who is Subject to Tax Audit?
| Category of Person | Threshold |
|
Business |
|
| Carrying on business (not opting for presumptive taxation scheme*) | Total sales, turnover, or gross receipts exceed ₹1 crore in the FY |
| Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB | Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme |
| Carrying on business eligible for presumptive taxation under Section 44AD | Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit. |
| Carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one financial year of the lock-in period i.e. 5 consecutive years from when the presumptive tax scheme was opted | If income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for |
| Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD | If income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for |
| Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD | If the total sales, turnover or gross receipts do not exceed ₹2 crore in the financial year, then tax audit will not apply to such businesses. |
|
Profession |
|
| Carrying on profession | Total gross receipts exceed ₹50 lakh in the FY |
| Carrying on the profession eligible for presumptive taxation under Section 44ADA | 1. Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme |
| 2. Income exceeds the maximum amount not chargeable to income tax | |
|
Business Loss |
|
| In case of loss from carrying on of business and not opting for presumptive taxation scheme | Total sales, turnover, or gross receipts exceed ₹1 crore |
| If taxpayer’s total income exceeds the basic threshold limit but he has incurred a loss from carrying on a business (not opting for presumptive taxation scheme) | In case of loss from business when sales, turnover, or gross receipts exceed ₹1 crore, the taxpayer is subject to tax audit under 44AB |
| Carrying on business (opting presumptive taxation scheme under section 44AD) and having a business loss but with income below basic threshold limit | Tax audit not applicable |
| Carrying on business (presumptive taxation scheme under section 44AD applicable) and having a business loss but with income exceeding basic threshold limit | Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit. |
Frequently Asked Questions
1. What is the time frame for tax audits?
Typically, the IT Department examines tax returns submitted within the past three years. Nevertheless, if a significant error is detected, they may extend this period to include additional years.
2. Is a tax audit obligatory for companies?
Unlike a statutory audit, a tax audit is not a mandatory requirement for certain companies or individuals. For more information get in touch with our experts today.
3. What should I do if I lack receipts for a tax audit?
If you do not possess receipts for a tax audit, taxpayers can examine their credit and bank statements to ascertain their payments. Additionally, suppliers and vendors can supply duplicate records.
4. Can I request an extension for my tax audit if I need more time to gather documentation?
Yes, you can request an extension for your tax audit if you require more time to gather necessary documentation.
5. What happens if I disagree with the findings of a tax audit?
If you disagree with the results of a tax audit, you have the right to appeal the decision. You can typically do this through a formal appeals process with the tax agency. Get in touch with experts for more inputs.
Conclusion
A tax audit is a structured and comprehensive process designed to ensure taxpayer compliance with tax laws and regulations. The key features of tax audit include objective verification, mandatory thresholds, independent examination, documentation review, and a focus on various aspects of taxation. The audit process involves specific procedures, communication with taxpayers, the potential for penalties and corrections, and the right to appeal findings. Confidentiality, record keeping, and adherence to the statute of limitations are also essential aspects of tax audits, all conducted by auditors who maintain their independence and impartiality throughout the process.
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