Provision for Income Tax Audit – Tax audit is the process of examining and evaluating the books of accounts of a firm or profession. Tax auditing aids in the examination of activities including the organization’s revenues, costs, deductions, and taxation. It simplifies the method of filing an income tax return for the purpose of taxes. A tax audit is conducted by a chartered accountant and later forwarded to the Income Tax Department.
SECTION 44B OF INCOME TAX ACT
Section 44AB of the Income Tax Act of 1961 contains rules relating to tax audits. This section outlines the requirements for the taxpayer to maintain proper books of accounts and other financial documents. This aids in the taxpayer’s full knowledge about tax, income, and deductions.
The aim of a tax audit is to verify the authenticity of the information provided by the assessee about his income and taxes. This section contributes to the prevention of fraud. The audit is carried out by a relevant authority or a chartered accountant in practice. Along with the income tax return, the audit report is sent to the Income Tax Department.
AIM OF THE INCOME-TAX AUDIT
The aim of a tax audit is to achieve the following goals:
- Ensure the books of accounts are kept up to date and accurate, and that they are certified by a tax auditor.
- After a methodical analysis of the books of account, the tax auditor notes any observations or irregularities and reports them.
- To submit required material, such as tax depreciation, compliance with various income tax laws, and so on. All of which assist tax officials in verifying the accuracy of the taxpayer’s income tax returns. Calculating and verifying net revenue, claiming deductions, and so on becomes better.
WHO ARE ELIGIBLE FOR Provision for Income Tax Audit?
Except for those who select presumptive taxes under sections 44AD, 44ADA, and 44AE of the Income Tax Act 1961, anyone who earns money from a business or occupation is required to keep books of accounts and undergo a tax audit.
The following taxpayers need a tax audit:
- An assessee who carried on a business with a net turnover of more than Rs. 1 crore the previous year.
- A person who earned more than Rs. 50 lakh in the previous year by his or her profession.
- Any assessee who has opted for sections 44ADA and 44AD but declares income that is less than the earnings calculated under presumptive taxes and income that exceeds the amount taxable under the Income Tax Act.
- Any assessee who has opted for sections 44AE, 44BB, and 44BBB but claims an income that is less than the earnings computed under the specified sections in any previous year.
ENTITIES REQUIRED MANDATORY AUDIT
If a taxpayer’s sales, turnover, or gross receipts in a financial year exceed Rs 1 crore, he or she must have a tax audit conducted. In certain other cases, however, a taxpayer could be needed to have their records audited.
With effect from AY 2020-21 (FY 2019-20), the Rs 1 crore threshold cap for a tax audit is proposed to be increased to Rs 5 crore if the taxpayer’s cash receipts are restricted to 5% of gross receipts or turnover and if the taxpayer’s cash payments are limited to 5% of the combined payments.
An audit report is a document that summarises the details of the auditing process. The audit report is required by the Income Tax Rules, Rule 6G. A chartered accountant prepares the tax report and files it online. The tax auditor prepares the audit report based on the information in Form 3CD.
In the following circumstances, the tax auditor must include the documentation in a correct format, either in Form 3CA or Form 3CB:
- Form 3CA– When an assessee who is carrying on a business or occupation is required to have books of accounts audited by some other law.
- Form 3CB- When an assessee who is carrying on a business or occupation is not required to get books of accounts audited by any other statute.
PENALTY FOR FAILING TO FILE A TAX AUDIT REPORT
If a taxpayer is expected to have a tax audit performed but fails to do so, the least of the following penalties can be imposed:
1. 5% of net revenue, turnover, or gross receipts
2. 150,000 rupees
The taxpayer must follow the rules of section 44AB of the Income Tax Act 1961 a person falls under the category of Taxpayer. This section specifies that after completing an audit of the books of accounts, all taxpayers must have an audit report. This is to properly reflect the taxpayers’ income-related activities, exemptions, and taxation.