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written by | May 12, 2022

Tax Auditing in India and Its Types

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The income tax audit is the evidence that generally evaluates if the company or an individual has filed the income tax returns for the particular year. Certain external agencies do audit the returns filed from the income, including the deductions and expenditures as per the rule by the Income Tax Act, 1961. Further, the audit process simplifies the issues of tax returns. The company's growth is reliable, and it is trustworthy if the return filing or the audits are done correctly.

Did you know?

India's longest income tax raid took place in 1981 against Sardar Inder Singh.

Also Read: What is a Statutory Audit? Types, Importance, and Process

Income Tax Audits in India

Ideally, if you have more than one business, you will be liable to audit your business's bank accounts if the overall turnover is more than ₹1 crore. Also, if you operate more than one profession, you need to audit your account books if the net receipt of all the accumulative professions crosses ₹50 lakhs.

It doesn't matter if you own a business or profession that does not have a turnover of more than ₹50 lakhs, but if you have sold the assets like vehicles or property, this will not be part of your professional profits. Such items are excluded from the calculation of the gross profits of the entire business.

Below are the items that are not taxable as per the income tax rules and will not be counted in the income tax audits.

  • Assets are considered for investment like shares, stock markets, and security.
  • Fixed assets
  • Income on rent
  • Income from general interest
  • Expense reimbursed client

You also need to ensure that it cannot be reversed if the audit report is filed. The audit reports can be reversed if the given account statement is changed based on the revision after acceptance of the annual general meeting or any change in the law by the Indian government. It would be best to mention the correct reason for reversing the report.

Why Is a Tax Audit Conducted?

Tax audits generally ensure that the organisation is paying the tax regularly and is very well following the tax procedures of the country. Generally, the tax to be paid is first audited by the professionals. All the account data and the records need to be checked first by the CA before paying the tax. To conduct a smooth audit procedure, the organisation must maintain all the account books and records. 

If the tax audit is conducted regularly, the people in business can maintain the data and the records properly without any glitches. This, in a way, is very much helpful for the growth of the company. The proper tax or audit ensures that the total income and claims of the reductions are made correctly and accurately by the business people. The chances of fraud reduce when the audit is done regularly. The audit also helps determine if the organisation is following the administration of tax laws and presenting the accounts correctly to the authorities when asked.

Who Conducts Tax Audits?

The chartered accountant can contact the text audit of the various firms and organisations. Various other firms conduct the audit as per the request. When the tax audit is performed, the signatory must sign the report on behalf of the firm that does the audit report. The candidate must be a chartered accountant and mention the membership number during the audit and details on the e-filing portal. The statutory auditor can also perform the tax audits. There is a certain limit on the number of audits that the charter accountants can do. The limit for the maximum number of audits that the accountant can do is 60.

As per the normal procedure, the auditor must get an appointment letter from the concerned organisation to get forward for the tax auditor. The appointment letter needs to be signed by the company's authorised person on which the income tax return is to be filed. The letter should also mention the remuneration offered to the auditor, and it should also specify the particular financial year in which the audit is required.

The general responsibility of appointing a tax auditor lies with the company's boards of directors. Generally, they also delegate the responsibility to other officers like the CEO or CFO in their absence. Moreover, the auditors can be appointed by the partner or the proprietor of the company. The company has a good turnover and generally appoints its charter accountants who can do the audits and pay the taxes on time.

Also, the management can remove the tax auditor if there is any delay in the report submission and if the report no longer has any specific due date. If you are hiring the auditor, you need to ensure he is preparing the perfect report and submitting it to the income tax division. If the charter accountants are providing the report on unfair grounds and do not follow the standards of the board, they can likely be fired from their role.

Also Read: What is an Audit Trail and Why Do We Need it?

What Are the Types of Tax Audits?

The three main types of tax audits are as follows:

External Report

Generally, the third parties and the auditors who do not belong to the company perform the external tax audits. The external financial audits identify the miss-statements in the financial records, and they also find if there is any glitch in the account statements. The third-party auditors provide the perfect statement that is not biased toward the company and, in a way, is for the company's betterment. A good auditor provides the perfect financial reports that allow the stakeholder to make better decisions for the company's growth. The best thing about the external audits is they don't have any relation or any soft corners towards the companies, and hence they will provide the best data and the audit reports. While with the internal audits, there may be chances of some internal bleach and unfair reports.

Internal Audit

Generally, the internal audits are conducted by the company employees, and the report is directly given to the management, including the board of directors. The company does use consultant auditors, which are not a part of the company but can audit the company to respect the auditing standards and provide a certain standard to the company. The auditors are used when an organisation does not have the in house resources to audit a certain part of the operation.

The result of the internal audit may require minor changes in the accounts to improve the company's financial health. The purpose of the internal audit is to ensure that all the employees are following the rules and regulations of the company and all the financial data in the records are being maintained. It also benefits the management and the financial team to grow the company better.

Internal Revenue Service Audits

The IRS performs the audit to verify if the taxpayers are doing the certain transaction correctly. When the IRS conducts an audit, it generally has evidence of some wrongdoing by the taxpayers. However, being selected for an audit is not necessary to indicate fraud. The IRS is made by the random statistical formula, which compares the tax return to the likely returns. It is generally a way to find out the glitch in the system and the errors in the tax returns.

Conclusion

Irrespective of any company or the individual, the audit is a must for the income tax payment. The audit highlights the glitch or the safety in the account, which is very helpful for the smooth working of the company. Certain auditors and the firm provide the audits regularly to ensure all your accounts are well managed. There are various types of audit activities performed by chartered accountants. The CA generally does the audit and highlights certain requirements or changes that need to be done in the company structure.
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FAQs

Q: Do you know what to do when conducting an audit?

Ans:

Check the notes to account for finished goods' quantitative features. Ensure that the overall amount of earnings distributed and the tax paid on them are by the audited profit and loss statement. Verify and acquire a copy of the tax payment challan and the date it was paid.

Q: How can I begin an income tax audit?

Ans:

The chartered accountant will submit an electronic tax audit report to the IRS. Using an e-filing account with the IRS, the taxpayer must approve the Chartered Accountant's tax return once submitted for filing.

Q: Who can be subject to tax audits?

Ans:

In India, any business that makes more than ₹1 crore in sales, turnover, or revenues must undergo a tax audit. As a professional, you qualify for a tax audit if you have more than ₹50 lakhs in receipts.

Q: Is it possible to be sentenced to prison for an IRS investigation?

Ans:

The IRS does not pursue illegal tax evasion prosecutions against many people, but those who are discovered face hefty penalties. In addition to paying hefty fines, they might face up to five years in prison if convicted of tax evasion.

Q: What is a tax audit?

Ans:

The Internal Revenue Service (IRS) audits your tax return to ensure that your revenue and expenditures are correct. The IRS examines your tax return more extensively during a tax audit to ensure that your income and expenditures are correct.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.