INCOME TAX AUDIT

Tax Auditing

The dictionary meaning of the audit is an official investigation of the accounts and production of the organization and preparing a report after investigation. The audit is performed by a typical independent body. Auditing is also known as systematic assessment.

What is a Tax audit?

There are different kinds of audits concocted for different companies or businesses under the auditing laws. For example, company audit includes law provision, cost audit, stock audit, etc. Tax Audit is the compulsory audit a company or an individual needs to perform as per the Income Tax Law. It is the examination of a business or any professional account carried out by taxpayers from the point of view of Income Tax experts. It makes the income computation process easier to file the returns.

Tax Audit Objects

The objectives of the tax audit are:

  • Ensure proper maintenance and correctness of account books and certification allotted by the tax auditor.
  • Reporting observations observed by the tax auditor while auditing the respective accounts and books through a methodical examination.
  • To report information of depreciation, compliance with different provisions of income tax. All these authorities verify the correctness of filed income tax returns by the taxpayer. Clarification and claiming of the tax refund also become easier after auditing.

Documents Required for IRS Audit


  • Receipt of your income investments
  • Bills with the date of purchase and the company name
  • Employment records of the company employees and related documents
  • Legal papers of the deduction or credits on your tax returns
  • All the tickets for the business trip
  • Theft or loss records to claim the insurance

Who is mandatorily subject to a tax audit?

A taxpayer has to perform the tax auditing when the turnover, sales, or gross business receipts are above Rs. 1 crore for the financial year. However, a taxpayer can get their accounts audited in other circumstances too.

We have categorized the various circumstances in the table below:

Category of person Threshold
Business
Carrying on business (not opting for presumptive taxation scheme*) Total sales, turnover or gross receipts exceed Rs 1 crore in the FY
Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBB Claims profits or gains lower than the prescribed limit under presumptive taxation scheme
Carrying on business eligible for presumptive taxation under Section 44AD  Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit
Carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one financial year of the lock-in period i.e. 5 consecutive years from when
the presumptive tax scheme was opted
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
Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD 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
Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44AD If the total sales, turnover or gross receipts does not exceed Rs 2 crore in the financial year, then tax audit will not apply to such businesses.
Profession
Carrying on profession  Total gross receipts exceed Rs 50 lakh in the FY 
Carrying on the profession eligible for presumptive taxation under Section 44ADA 1. Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme  2. Income exceeds the maximum amount not chargeable to income tax
Business loss
In case of loss from carrying on of business and not opting for presumptive taxation scheme Total sales, turnover or gross receipts exceed Rs 1 crore
If taxpayer’s total income exceeds basic threshold limit but he has incurred a loss from carrying on a business (not opting for presumptive taxation scheme) In case of loss from business when sales, turnover or gross receipts exceed 1 crore, the taxpayer is subject to tax audit under 44AB
Carrying on business (opting presumptive taxation scheme under section 44AD) and having a business loss but with income below basic threshold limit Tax audit not applicable
Carrying on business (presumptive taxation scheme under section 44AD applicable) and having a business loss but with income exceeding basic threshold limit Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit

Frequently Asked Questions

How is the tax audit done?

Tax Audit is compulsory as per the Income Tax Act. The Chartered Accountant or the Tax Auditor is required to submit his findings and observations in the form of the audit report.

Is tax audit mandatory in case of loss?

If the Total taxable income is below the threshold limit (2.5 lakh for youth and 3 lakh for senior citizens), no tax audit is required.

Is tax audit compulsory for all companies?

Tax Audit is compulsory for all the LLPs, companies, and individuals whose turnover is more than the threshold limit(5 crore for FY 2020- 21)

What is a GST audit?

GST audit is the audit conducted for the Goods and Services. The auditing is done when the turnover of any business exceeds the threshold limit of 2 crores