44AB Tax Audit Requirements: What You Need to Know?

Essentially, an audit refers to an official evaluation of an organization’s accounts to rule out unintentional errors or intentional discrepancies. A tax audit has additional layers of complexity because it entails an in-depth examination of accounts to ensure compliance with tax laws and guidelines. In this comprehensive guide, we will share an overview of tax audits under 44B of the Income Tax Act.

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Table of Contents

Understanding 44AB Tax Audit Requirements

Different Types of Tax Audits

Purpose of Tax Audits

44AB of the Income Tax Act

Tax Audit Forms

Most Asked Questions

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Understanding 44AB Tax Audit Requirements

Numerous types of audits are carried out in an organization in accordance with different laws. These include cost audits, stock audits, and business audits or statutory audits carried out in accordance with company law regulations. Similarly, income tax legislation also requires what is known as a "Tax Audit." As the name implies, tax audits entail looking over the books of any kind of business or profession from an income tax perspective. It simplifies the process of calculating income for the purpose of submitting an income return. A certified chartered accountant performs an audit twice a year for the taxpayer under 44AB.

Different Types of Tax Audits

Here are different types of tax audits taxpayers may need to get to stay on the right side of the laws and avoid penalties in the long run.

• Correspondence/Internal Revenue Service (IRS) Audit is the simplest kind of audit. It consists of the IRS requesting further information concerning a certain section of the taxpayer's return statement by mail in a brief letter of no more than 600 words.

• Field Audit involves a team of experts conducting a thorough review of the records at the taxpayer's home or place of business. 

• Office/Desk Audit involves a comprehensive examination of the taxpayer's tax records at the IRS office in addition to a one-on-one interview. The purpose of the interview is to learn more about the employee's responsibilities and duties. The employee and the supervisor should have separate interviews.

• Taxpayer Compliance Measurement Program (TCMP) is the most time-consuming and tightly defined type of auditing that requires every part of the revenue to be sustained by unerring documentation.

Purpose of Tax Audits

The following goals are the focus of tax audits: 

1. Ensuring the correctness and appropriate management of the books of accounts and having a tax auditor certify them

   
   

2. Conveying any observations or discrepancies the tax auditor finds after carefully going over the books of accounts

   
   

3. Reporting necessary information, such as tax depreciation and compliance with different income tax laws

These all help tax authorities confirm that the income tax returns that taxpayers complete are accurate. It also gets easier to calculate and verify total income, file claims for deductions, etc.

44AB Tax Audit Requirements

Section 44AB of the Income Tax Act 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. The section is applicable in the following cases:

• A company's annual revenue surpasses the revised threshold of more than Rs. 1 crore but less than Rs. 5 crores, as long as their cash inflows and outflows are both restricted to 5% of total revenue or 5% of turnover, respectively

• A person works and earns more than 50 lakh rupees a year in gross receipts

Under section 142(2A), there is a unique situation in which the assessing officer formally requests an audit of a person's account

Tax Audit Forms

Any person mandated to get their accounts checked under 44AB of the Income Tax Act has to submit a series of forms. Here is a list of these forms and the details they include:

Form 3(CA): 

Forn 3(CA) is for an audit report that a certified auditor of the assessee must fill out and submit without exception. You can get a free version of this form immediately from the Income Tax website. For taxpayers who operate a business or practice, this form is necessary; but, they are not compelled by any other law, other than income tax legislation, to have their accounts audited. It is different from Form 3CA in the following ways: 

• Taxpayer’s personal information, including name, residential address, and PAN

• Auditor's personal information, their seal, and signature

• The audit report's date and year

• Information from annexes, such as balance sheets, income and expense accounts for the relevant time, and other documents

• A statement of declaration in the form of 3CD with the audit observations

Form 3(CB):

A person in charge of the business or their profession who is not involved in the financial or accounting aspects of the audited company must produce the audit report in accordance with all applicable laws, with the exception of the 1961 Income Tax Act. For taxpayers who operate a business or practice, this form is necessary; but, they are not compelled by any other law, other than income tax legislation, to have their accounts audited. It is different from Form 3CA in the following ways:

• Filing of form 3CA prior to this form is mandatory

• It applies to all tax assessees, regardless of annual income

Form 3(CD)

With forty-one clauses, it is a complex and comprehensive informational statement. There are 32 clauses in these two portions, A and B, which are essential to submitting income tax returns. Rendering of the form relates to Income Tax Rule 6G(2). This form has several specific fields that must be filled out, including information about the taxpayer's revenue, annual yield, profit, and asset-liability breakdown. This form's application to all business audits nationwide is the single noteworthy feature that sets it apart from the others.

Form 3(CE)

This audit report pertains solely to non-resident Indians (NRIs) or international businesses that manage their fixed permanent operations in India and receive royalties or fees for technical services from Indian corporations or the government. In relation to filing Income Tax Returns under Section 44DA of the Income Tax Act, this document is also crucial. With the exception of the fact that it is solely for those who are not Indian nationals, the auditor must fill out the identical details as on the other forms.

FAQ

Q1. How are tax audit reports furnished?

The tax auditor furnishes a tax audit report online with his/her login details as ‘Chartered Accountant’. After they upload the audit report, the taxpayer can accept or reject it. If the report is rejected for any reason, the entire procedure is followed again until the taxpayer accepts the report.

Q2. When should a tax audit report be filed?

A tax audit report should be filed on or before the deadline for filing the income return. If the taxpayer has engaged in an international transaction, it is November 30 of the next year; for other taxpayers, it is September 30 of the following year. The year that follows is the year of assessment.

Q3. What is the penalty for delay or not filing a tax audit report?

If a taxpayer is mandated to complete the tax audit but neglects to do so, they may be penalized with the least amount of the following:

• Rs 1,50,000

• 0.5% of the total sales, turnover or gross receipts

Q4. When is no penalty levied for delay or not filing a tax audit report?

Yes, the deduction can be claimed individually or jointly by the co-owners of the property, with each co-owner eligible for a deduction up to Rs. 1.5 lakh.

Q5. What are tax audit criteria?

A tax audit is necessary if your total income from all enterprises exceeds Rs. 1 crore and your total income from all professions exceeds Rs. 50 lakh. If you are a professional and a business owner, however, your audit will not be based on your total income.

Q6. What is the tax audit limit for a professional?

In India, any business with annual sales, turnover, or receipts greater than Rs. 1 crore is required to undergo a tax audit. If you are a professional with receipts exceeding Rs. 50 lakh, you can be subject to a tax audit.

Q7. What is the tax audit due date?

The deadline for filing the income return is when you must submit the tax audit report, if not earlier. It is November 30, of the next year, if the taxpayer has transacted internationally, and September 30, of the following year, for all other taxpayers. The year that follows is the evaluation year.