In this blog article, we will discuss what exactly tax audit and statutory audit are and the significant difference between tax audit and statutory audit. But first, let us see what you mean by a tax audit.
What is a tax audit?
A tax audit is basically when the IRS examines the information on your tax return to ensure all the information reported is correct. There are four types of tax audits: Field, Correspondence, Taxpayer Compliance Measurement Program and Office Audit. Incorrect information or incomplete tax returns may trigger an audit. This blog is for those business owners looking to learn the best ways to avoid a tax audit and what to do if they receive an audit notice from the IRS. Most of the taxpayers is concerned regarding the possibility of an audit by the IRS. A tax audit is a thorough examination of an organization's or individual's tax return to confirm that financial information is being reported correctly. Although the probability of being singled out for closer scrutiny is statistically low, certain factors could increase your chances of being audited. Fortunately, various things can be done to minimize the likelihood that the IRS will audit you and your business.
Different types of tax audits you should know.
All tax audits are not similar to each other. The one you encounter is based on your present situation, what the IRS obtained from your tax return, and the items needed to resolve the issue.
1. Correspondence audit
In the case of a correspondence audit, you will receive a direct order or letter from the IRS requesting proof of a statement or documentation to help them verify the information on your tax return. It is the most usual audit type, and you're most likely to get this letter if you have a high level of charitable giving compared to your income.
2. Office audit
This happens when you have a one-on-one meeting at an IRS office with a tax auditor. This occurs when there are several issues with your tax return that a correspondence audit cannot resolve.
3. Field audit
This is an in-person meeting with an IRS auditor. In this case, they will come to your CPA or tax representative's office (or, if you insist on handling things yourself, your place of business or your home) to find out the details of your tax return.
4. Taxpayer compliance measurement program audits
This is when IRS auditors examine every item and event in your life that they believe may affect your taxable income. They aim to check that all the papers you have provided are really from you. This is a periodic audit and may require you to show your birth certificate, marriage certificate, and other personal documents.
What is a statutory audit?
A statutory audit is a legally obligated check of the correctness of a company or government's financial statements and records. An audit refers to an examination of records held by an organization, business, government entity, or individual that includes an analysis of financial statements or other records. The objective of a financial audit is often to determine whether funds have been adequately managed and whether all required documents and filings are accurate or not. Companies subject to audit include publicly traded companies, banks, brokerage and investment companies, and insurance companies.
Indian Judiciary considers statutory audit as a mandatory audit for a corporate collector. The purpose of the audit is to manage the company's legal accounting. The Companies Act 2013 governed the appointment of auditors, removal of an auditor, rights and duties of an auditor, and remuneration. The auditor checks the audit as per the instructions of the law, and the audit will cover the organization. Companies can appoint an auditor with approval from their shareholders at the time of the company's annual meeting. In such a case, they also have authority over the auditor's remuneration. Under the Companies Act 1956, registered colonies can hire a chartered accountant. The company may employ such a person after final statements from the company's accounting records have been prepared. When the audit is done, the statutory auditor will submit his report. The auditor's report must contain an accurate and fair view of the accounts and his personal opinions. The audited financial statements must comply with the provisions of the Companies Act.
Difference between a tax audit and a statutory audit?
Here are certain points to understand the difference between tax audit and statutory audit in detail-
A statutory audit is carried out as required by law or statute. On the other hand, a tax audit is also mandatory if the company has a specific type of turnover and gross income.
A statutory audit can be done by any external auditor, while a company can hire an experienced chartered accountant to do a tax audit.
Statutory audit is covered by Section 143 of the Companies Act 2013. On the other hand, a tax audit is covered by Section 44AB of the Income Tax Act 1961.
Every company registered under the Companies Act of 2013 is subject to a mandatory audit. On the other hand, any company, LLP, or partnership firm, as well as individuals or professionals, can opt for a tax audit if their turnover or gross receipts exceed the threshold.
The threshold limit of turnover or gross income is not mandatory for the performance of a statutory audit. A statutory audit is mandatory for every company, even if the company has no turnover. Tax audit, on the other hand, is mandatory for any organization whose annual turnover is more than ₹ one crore and whose gross income is more than ₹ 25 crore.
The company must carry out a mandatory audit within six months of the end of the financial year. However, before starting the audit, the company must organize a general meeting with company representatives and shareholders. On the other hand, a company or an individual must conduct a tax audit and submit a tax report to the Income Tax Department by September 30 of the financial year.
A fine of ₹ 25,000 to ₹ 5,00,000 may be imposed on the company if the company makes any non-compliance with the statutory audit. The fine for officials for not complying with the audit is ₹ 10,000 to ₹ 1,00,000. During a tax audit, the penalty maybe 0.5% of total sales, gross income, or turnover. If paid in cash, the fine will be a minimum of ₹1,50,000.
Lawgical India is a leading legal service provider in India. Lawgical India has an excellent track record of maintaining client satisfaction with the smooth delivery of its services. Lawgical India can help you with your taxes and audits. You can easily get them through their website and arrange a call with the experts.
