Introduction
A tax audit is an examination of your tax return by the IRS (Indian Revenue Services) to verify that your income and deductions are accurate. A tax audit is when the IRS decides to examine your tax return a little more closely and verify that your income and deductions are accurate.
There are various types of audits being conducted under different laws such as company audit/statutory audit conducted under company law provisions, cost audit, stock audit etc. Similarly, income tax law also mandates an audit called ‘Tax Audit’.
As the name itself suggests, tax audit is an examination or review of accounts of any business or profession carried out by taxpayers from an income tax viewpoint. It makes the process of income computation for filing of return of income easier.
Objectives of tax audit
Tax audit is conducted to achieve the following objectives:
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Ensure proper maintenance and correctness of books of accounts and certification of the same by a tax auditor
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Reporting observations/discrepancies noted by tax auditor after a methodical examination of the books of account
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To report prescribed information such as tax depreciation, compliance of various provisions of income tax law, etc.
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All these enable tax authorities in verifying the correctness of income tax returns filed by the taxpayer. Calculation and verification of total income, claim for deductions etc., also becomes easier.
Who is mandatorily subject to tax audit?
A taxpayer has to get tax audit done, if the sales, turnover or gross receipts of business exceed Rs 1 crore in the financial year. However, a taxpayer may require getting their accounts audited under certain other circumstances. We have categorized the various circumstances in the table mentioned below:
NOTE: The threshold limit of Rs 1 crore for a tax audit is proposed to be increased to Rs 5 crore with effect from AY 2020-21 (FY 2019-20) if the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer’s cash payments are limited to 5% of the aggregate payments. We present the various categories of taxpayers below:
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A taxpayer who engages in business in the financial year
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Category Of Person |
Threshold |
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Carrying on business (Taxpayer does not opt for presumptive taxation scheme) |
Total sales, turnover or gross receipts exceed Rs 1 crore in the FY |
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Carrying on business. The business is eligible for presumptive taxation under Section 44AE, 44BB or 44BBB |
The taxpayer claims profits or gains which is less than the prescribed limit. The limit under the presumptive taxation scheme of Section 44AE, 44BB or 44BBB. |
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A person who is carrying on a business that is eligible for presumptive taxation under Section 44AD |
The taxpayer declares taxable income that is less than the prescribed limit. The limit under the presumptive taxation scheme of Section 44AD. Additionally, the income exceeds the basic threshold limit |
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Carrying on the business and is not eligible to claim presumptive taxation under Section 44AD. The reason is opting out of the presumptive taxation in any one financial year. The opt-out is made in any of the financial years of the lock-in period of 5 consecutive years from the year the presumptive tax scheme was opted for the first time |
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. |
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Carrying on business and declaring profits as per presumptive taxation scheme under Section 44AD |
Total sales, turnover or gross receipts is less than Rs 2 crore in the financial year |
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A taxpayer who engages in a profession in the financial year
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Category Of Person |
Threshold |
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Carrying on Profession |
Total gross receipts exceed Rs 50 lakh in the financial year |
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Carrying on Profession. The business is eligible for presumptive taxation under Section 44ADA |
The taxpayer claims profits or gains which is less than the prescribed limit u/s 44ADA. The total income exceeds the basic exemption limit. Example- Rs 250000 is the basic exemption limit for individual taxpayers not being a senior citizen. |
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A taxpayer who suffered a business loss in the financial year
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Category Of Person |
Threshold |
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Loss from carrying on a business. The taxpayer does not opt for a presumptive scheme |
Total sales, turnover, or gross receipts exceed Rs 1 crore |
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The total income exceeds the basic exemption limit-Loss from carrying on a business. The taxpayer does not opt for a presumptive scheme |
The loss is from a business that has a total income that exceeds the basic exemption limit |
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The total income does not exceed the basic exemption limit-Loss from carrying on a business. The taxpayer opts for a presumptive scheme u/s 44AD |
Tax audit is not applicable |
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Loss from carrying on a business. The taxpayer does not opt for a presumptive scheme u/s 44AD, the total income exceeds the basic exemption limit |
Total Income exceeds the basic exemption limit-Taxable income below the limits prescribed under the presumptive tax scheme |
Penalty for non-compliance to tax audit
A taxpayer who fails to comply with tax audit provisions will have to pay the applicable penalty. The penalty as per the Income Tax Act will be least of the following:
Rs 1,50,000
0.5% of the total sales, turnover, or gross receipts
Example-
Mr. Amit carrying on a business and is liable for a tax audit. His total sales in the financial year are Rs 4 crores. He fails to get his books of account audited as per section 44AB.
The penalty will be least of the following:
Rs 1,50,000
0.5% of the total sales. Rs 4 crore * 0.5% = Rs 2,00,000
Here the penalty will be Rs. 2,00,000.
However, the income tax department waives off the penalty where the taxpayer shows a reasonable cause for non-compliance.
The following are a few of the reasonable reasons for which penalty waiver is applicable:
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Delay caused by the resignation of the tax auditor
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Delay caused by death or physical inability of the partner responsible for accounts
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Natural calamities
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Delay caused by labor issues such as strikes or lock-outs
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Delay caused by loss of accounts due to theft or fire, or incidents that are not under the assessee’s control.