Understanding Tax Audit

A tax audit is an inspection of a person's income under the income tax act to confirm that there are no discrepancies or fraudulence involved. It is a process of scrutinized verification to ensure that the income and the deductions are precise.

An audit is done at least twice a year by a certified chartered accountant of the taxpayer under section 44AB.

Different types of Tax audits you need to know about :

  • 1. Correspondence/Internal Revenue Service (IRS) Audit - This is the most elemental type of audit as it only involves the IRS mailing a brief letter of not over 600 words requesting more information about a specific part of the taxpayer’s return statement.
  • 2. Office/Desk Audit - As the name suggests, it is a one-to-one interview with the taxpayer and a thorough review of their tax records in the IRS office. It is an interview with the staff to obtain information about his/her duties and responsibilities. You should conduct a separate interview with the employee and the supervisor.
  • 3. Field Audit - This type of audit is performed at the taxpayer’s house or office by an expert team in order to do an in-depth examination of the records.
  • 4. Taxpayer Compliance Measurement Program (TCMP) - This is the most time-consuming and tightly defined type of auditing that requires every part of the revenue to be sustained by unerring documentation.

There can be few other types of audit also https://www.patriotsoftware.com/blog/accounting/different-types-of-audit/

Section 44AB and its conditions of applicability

According to the Income Tax Act 1961, Section 44AB refers to the audit of accounts of a separate set of individuals that meet the parameters prescribed under it. These accounts are audited only by a lawfully recognized chartered accountant to help the Assessing Officer (AO) with the estimation and computation of the net income of individuals subjected to audit.

There are three situations under which this section is applicable:

  • When the turnover of a business exceeds the revised threshold limit of above rupees 1 crore and less than 5 crores in a financial year provided their cash receipts are limited to 5% of the turnover or their cash payments are limited to 5% of the aggregate payments. (The limit of Rs. 5 crore has been increased to Rs. 10 crore in last budget)
  • When the individual is carrying out a profession and the annual gross receipt exceeds rupees 50 lakh.
  • There exists a special case where the assessing officer officially orders an audit over an individual's account under section 142(2A).

Any individual who is mandated to get his/her accounts checked under section 44AB is required to submit a series of forms. They are forms 3CA, 3CB, 3CD, and 3CE.

Form 3(CA)

It is an audit report form that needs to be compulsorily filled out and submitted by a certified auditor of the tax assessee. This form can be directly downloaded from the Income Tax website free of cost. This form is mandatory for taxpayers who are carrying Business and Profession and is already mandated to get their accounts audited under any other law.
The report possesses significant details that include:

  • Personal details such as name, residential address, and PAN of the taxpayer.
  • Personal details of the auditor along with their signature and seal.
  • Date and year of the audit report.
  • Annexure details that include balance sheets, period of income and expenditure account, and other documents.
  • Statement of declaration that forms 3CD has been attached along with the audit observations associated with it
Form 3(CB)

It is an audit report that has to be produced on the behalf of an individual who manages the company or the profession and is not involved in the financial aspects and the accounting of the company audited according to any law apart from the 1961 Income Tax Act. This form is mandatory for taxpayers who are carrying business and profession but who are not required to get their accounts audited under any other law apart from Income Tax law. The two primary features that differentiate this form from the form 3CA are:

  • Compulsive requirement of the submission of form 3CA before it.
  • Submission of this form applies to any tax assessee irrespective of their annual income.
Form 3(CD)

It is an intricate and detailed statement of information with 41 clauses. These are divided into two parts A and B of which 32 clauses form an integral aspect of filing the Income Tax Returns. The form is rendered concerning Rule 6G(2) of the Income Tax Rule. Some among the multiple detailed fields of requirement present in this form are the taxpayer’s revenue, annual yield, profit, and asset-liability details.

The only salient component that differentiates this form from the rest is how this document applies to all business audits across the country.

Form 3(CE)

It is an audit report exclusively for the non-residents of India (NRI) or the foreign companies handling their fixed permanent business in India and receiving royalty or fees for technical services from the government or an Indian concern. This document is also important for filing the Income Tax Returns concerning Section 44DA of the Income Tax Act. The details of particulars needed to be filled by the auditor in this form are the same as that of the other forms except, it is only for people other than Indian citizens.

Additional Information

The Income Tax Department of India levies a penalty on taxpayers who abstain from getting their accounts audited regularly or fails to file any of the above-mentioned audit reports. The penalty could range from a minimum of 0.5% from total sales to a maximum of Rs. 1,50,000. Some individuals are relieved of tax penalties if the reason for their dereliction of duty stands valid and well-grounded to the ITD.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.