Tax Audit

TAX AUDIT:

There are various kinds 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.

Characteristics of Tax Audit:

When people hear “tax audit”, government entities and financial watchdogs are the first groups that come to mind. In actuality, tax audits can also be rolled out internally or by third-party consultants.

In many companies, internal auditors (IA) are employed to review financial records and activities regularly. This is meant to be a proactive method of avoiding further investigation by regulatory agencies.

Alternatively, some companies choose to hire a third-party auditor. This certified public accountant (CPA) will objectively double-check all financial reports without needing to study each action’s rationale.

Types of tax audits:

All tax audits are not the same. The one you encounter depends on your situation, what the IRS gathered from your tax return and the items that are needed to resolve the issue.

1. Correspondence audit: In this case, you will receive a direct order or letter from the IRS requesting a proof of statement or documentation that will help them verify the information reported on your tax return. The most common type of audit, and you’re likely to receive this letter if you have a high level of charitable contributions compared to income.
2. Field Audit: This is a face-to-face meeting with an IRS auditor. In this case, they come to your CPA’s or tax attorney’s office (or, if you insist on handling things yourself, your place of business or home) to hash out the details of your tax return. “If there is inventory involved in the business, the auditor will usually want to observe the actual inventory and review inventory records at the business location,”
3. Office Audit: This is when you have an in-person meeting with a tax auditor at an IRS office. This occurs when there are several issues on your tax return that a correspondence audit won’t fix. Sometimes this happens because a business operating as a proprietorship has some unusual transactions.
4. Taxpayer Compliance Measurement Program audits: This is when IRS auditors examine every item and event in your life that they feel can affect your taxable income. This is a rare audit and may require you to show your birth certificate, marriage license and other personal documents. Their goal is to check that all the paperwork you provided is actually from you.

Advantages of Tax Audits:

• It can highlight any financial discrepancies in your cash flow.
• It can help you and your organisation discover better ways to be tax-compliant.
• It can prove an entity’s transparency, truthfulness, and financial credibility.
• It can thoroughly test the efficiency and efficacy of an entity’s current financial management system.

Qualities of Tax Auditor:

• The tax auditor must be able to decipher nuanced data.
• They must be able to understand the stories that each financial report paints.
• They must be able to translate their findings into actionable data.
• They must be able to pinpoint any discrepancies in large amounts of financial data.
• They must be clear in how he communicates with the employees of the organisation. This is to ensure that nothing is misconstrued.
• They should have a pleasant and dynamic personality.

  Penalty for Completing Tax Audit:

If a taxpayer who is required to obtain tax audit does not get the accounts audited, then penalty could be levied under Section 271B of the Income Tax Act. The penalty for not completing tax audit is 0.5% of the turnover or gross receipts, subject to a maximum of Rs.1,50,000.