Financial Risk Manager

As per recent Amendments of Finance Act, 2009, everyone knows FBR can appoint for outsource of Income Tax Audit to the Chartered Accountants Firm. But number of professional Accountants, Finance professionals & Auditors are not fimaliar or awarness about the tax audit & its procedure due to its different from Financial or Statutory audit.

What is an Income Tax Audit?

An income tax audit is an inspection conducted by a government representative to confirm that someone's taxes were prepared correctly. Tax audits are very intimidating for most taxpayers, and the important thing to remember about audit notices is that they are not accusations, and that taxpayers are not being required to prove that they are not guilty of something when they are audited. Audits are usually performed on an entirely random basis, with taxpayers being selected by the Commissioner of Income Tax.

In an income tax audit, the taxpayer is required to show documentation and support for every aspect of his or her tax return. For example, if someone claims itemized deductions, receipts for those deductions must be produced, in addition to justifications for why the taxpayer felt that those deductions were legitimate. Tax deducted by bank on Cash withdrawal on higher side than compare to business activity it also attract for tax audit. In addition, taxpayers must open their accounting methods to inspection, and demonstrate that all of their income was in fact properly documented and claimed on the tax return.

Audits are usually performed because a taxpayer was randomly selected by the Commissioner of Income Tax. Certain areas of tax returns are especially prone to errors, so the Commissioner of Income Tax may weight people with things like high income, high levels of deductions, or repeated business losses for audits. Taxpayers may also be selected for auditing when they fail to pay their taxes, or when they request an installment plan to pay taxes.

In a correspondence income tax audit, the taxpayer is sent a notice and asked to return documents by mail. There are two types of Income Tax Audit which are as follows:-

1. Field Audits

Many taxpayers in pakistan are not aware of this kind of income tax audit. Field audits occur when FBR agents come to the taxpayer in the office to discuss tax issues as such power was conferred by the FBR to the selected Chartered Accountants Firm in shape of outsourcing of tax audit in the recent Finance Act, 2009.

2. Office audits

Office Audit requires the taxpayer to show up in a government office like Regional Tax Office / Large Tax Payer Unit with supporting documentation on a specific day or time. The FBR agent/ relevant Income Tax Officer/ Commissioner of Income Tax assigned to the case will review the material and make a determination on the basis of that review.

Sometimes, someone's taxes are audited and everything appears to be in order, in which case no action is taken. In other instances, over or underpayment of taxes is detected, and the issue will need to be corrected. If the taxpayer engaged in activity which is fraudulent or illegal, he or she can face legal penalties in addition to fines.

Mistakes happen on everyone's taxes now and then, and as long as taxpayers can demonstrate that an error is a true accident or the result of an action taken in good faith, the government is usually satisfied with a correction and no other action. Taxpayers can make the audit process smoother by taking the time to fully prepare for an income tax audit so that all of the information is organized and available, and by being polite and helpful to the auditing team. Consulting chartered accountant or income tax lawyer can be advisable if someone is preparing for an income tax audit.

The business community in Sindh and Punjab is perturbed at the flurry of notices received from the tax department in the last number of months. In certain instances, the department had re-opened cases of tax returns filed over the past five years. Taxpayers have been advised to make prompt payment to avoid tax evasion.

From the FBR point of view, it was to improve recovery the FBR has started the exercise of selective audit to” bridge the gap between the tax potential and its realisation.”

Presently, a taxpayer is required to maintain prescribed documents and records for five years from the end of relevant tax year. As per recent amendment in U/s. 174,176, 177 & 210 of the Income Tax Ordinance, 2001, require the taxpayer to maintain documents and records till final decision in any proceedings for assessment, appeal, revision, reference, petition and any proceedings before Alternative Dispute Resolution Committee.

As reported, the Board is considering outsourcing of tax audits to Chartered Accountant Firms. To enable the Chartered Accountant Firms to conduct such tax audits, the Finance Act seeks to empower Chartered Accountant Firms, with the prior approval of the Commissioner of Income Tax, to obtain and retain information, record or computers for such time as necessary.

Similarly, the amendment empowers the Commissioner to delegate the powers to conduct the audit of persons selected for audit to a Firm appointed by the Board.

INSTRUCTIONS FOR INCOME TAX AUDIT

Instructions

Things you will need:

· Copies of all affected tax returns
· Copies of Profit & Loss account and Balance Sheet
· Copies of all relevant receipts and other information
· Copies of Tax Challans & Other evidences for deduction of taxes
· Copy of Tax Computation
· Name and contact information for a tax accountant or lawyer

1. Step 1

Read the notice carefully. Some audits involve only parts of a single year's tax return, while others can include entire returns for multiple years. In addition, some audits request information by mail, while others require a meeting with an FBR agent/ relevant Income Tax Officer/ Income Tax Commissioner. Understanding what the FBR is asking for is vital to ensure that you prepare precisely for the specified audit.

2. Step 2

Start immediately. You will need plenty of time to pull your information together, to request information from others, such as buyers/ sellers, charities, credit card companies, and banks and to work with a tax professional.

3. Step 3

Consult a tax accountant or lawyer. The tax payment codes are extremely complex, and require years of study to fully comprehend. It's best to take the advice of professionals when responding to an audit. They can tell you what the audit means, what the consequences might be, and the exact information you will need to provide.

4. Step 4

Gather the required information. Hopefully, you stored all of the relevant receipts and other information when you filed your tax return, and so you will have an easy time of creating copies in preparation for the audit. If not, then you will need to locate all of the required information.

5. Step 5

Organize your information. Now that you have all of your information in place, put it in the proper order. All of the information should be laid out as in the audit notice. That way, it will be easier for you and your tax professional to double-check your information and have it ready for the response.

6. Step 6

Respond to the audit. If your audit is in person, either you or your tax professional can represent you to the FBR agent/ relevant Income Tax Officer/ Income Tax Commissioner. If you are not required to be at the audit, have your professional attend alone with a power of attorney. If your audit requires that you mail your response to the FBR, then send copies only and ensure that you've answered all of the issues outlined in the audit notice.

7. Step 7

Act on the FBR findings. You may have to pay an additional amount to the FBR, return part of a refund, or you may receive money back. You also have the right to appeal the FBR agent's findings to the Commissioner Appeal or the Appeals Division, and you can take your case to the High Court’s Tax Bench.

By: Muhammad Mustafa Rahim, Rahman Sarfaraz Rahim Iqbal Rafiq,Chartered Accountants
Sources:Complete Tax Solutions, English Law Dictionary, FBR