Tax audit is a crucial aspect of the Indian income tax system, governed by Section 44AB of the Income Tax Act, 1961. It is a comprehensive examination of an individual’s or a business organization’s financial records, tax returns, and books of accounts to ensure compliance with the provisions of the Income Tax Act. The primary purpose of a tax audit is to verify the accuracy of the information reported on tax returns and to identify any discrepancies, errors, or potential instances of tax evasion or fraud.
Tax audits can be conducted by tax authorities, such as the Internal Revenue Service (IRS) in the United States or its equivalent agencies in other countries. These audits are typically carried out to ensure that taxpayers are paying the correct amount of taxes and to maintain the integrity of the tax system.
In this blog, we will delve into the details of tax audits, including who is required to undergo them, the forms used for reporting, due dates, and potential penalties.
Who is required to get a Tax Audit?
Tax audits are mandatory for specific individuals and entities under Section 44AB. Here are the key criteria:
Businesses: A person carrying on a business must undergo a tax audit if their total sales, turnover, or gross receipts exceed or exceed Rs. 1 crore for the financial year.
Presumptive Taxation Scheme: If a business has opted for the presumptive taxation scheme under Section 44AD, a tax audit is required when the total sales, turnover, or gross receipts in business for the year exceed or exceed Rs. 2 crore.
Note: The threshold limit for businesses can increase from Rs. 1 crore to Rs. 10 crores if cash receipts and payments during the year do not exceed 5% of total receipts or payments.
Professionals: Individuals engaged in a profession must undergo a tax audit if their gross receipts in the profession for the year exceed Rs. 50 lakhs.
Section 44AD Modification: An assessee who declares profit for any previous year as per Section 44AD and subsequently decreases profit for any one of the five assessment years succeeding the previous year, lower than the profit computed as per Section 44AD, and if their income exceeds the amount not chargeable to tax, a tax audit is mandatory.
Presumptive Taxation Scheme Modifications: Individuals eligible to opt for presumptive taxation schemes under Section 44ADA, 44AE, 44BB, or 44BBB but claim profits or gains lower than those computed under the presumptive taxation scheme, and if their income exceeds the amount not chargeable to tax, must undergo a tax audit.
Audit under Other Laws: If an entity is required to get audited under any other law in force, Section 44AB does not necessitate a separate audit of accounts.
Forms for Tax Audit Reporting:
Tax audit reports are filed electronically using the following forms:
Form 3CA & Form 3CB: Tax audit reports are furnished using either Form 3CA or Form 3CB. Form 3CA is used when an audit has been conducted under any law other than the Income Tax Act. Form 3CB is used when the audit has been conducted under any Income Tax law.
Form 3CD: Along with either Form 3CA or Form 3CB, a professional or a chartered accountant (CA) submits Form 3CD, which contains the particulars of the tax audit.
The last date for filing the tax audit report is September 30th of the relevant assessment year. It’s essential to monitor notices issued by the income tax authorities for any extensions in due dates.
Penalties for Non-Compliance:
Failure to comply with the tax audit requirements can result in penalties under Section 271B of the Income Tax Act, 1961. The penalty may be the least of the following:
0.5% of the total sales, turnover, or gross receipts.
However, if there is a reasonable cause for the failure to undergo a tax audit, no penalty shall be levied under Section 271B.
Understanding tax audits under Section 44AB is essential for businesses and professionals to ensure compliance with the Income Tax Act. Failure to undergo a tax audit when required can result in penalties, so it’s crucial to stay informed about the applicable rules and deadlines to avoid any legal consequences.