What happens in a tax audit?

Generally speaking, any audit is about collecting information and verifying whether certain laws/ rules/ standards have been maintained. Tax audits are conducted to verify whether the tax laws have been complied or not.

In case it is got done internally (by the management) misakes are highlighted and corrective measures are taken. Further value addition for optimisation is done.

In case audit is conducted by the tax department, mistakes and non compliances are identified and audit memos/ notices are issued demanding for payment of tax/ demand of tax along with interest and penalty.

Audit by department also depends a lot on the tax for which audit is being conducted.

Audits for State taxes (VAT) are generally more on other aspects than on merits. Even if the assessee is correct a demand shall be raised on some or the other ground.

Not that w.r.t. taxes administered by the Central Govt. (Income Tax, Excise, Service Tax) aspects other than merits are not discussed. However, these are comparatively more on merits than with the sole aim of raising demands on absolute assumptions.

What actually happens on ground is:

1. A notice stating period under audit, time of visit, details required, etc. is issued. This is audit not raid. Audits can be conducted in office of the tax department also. Without even a single visit at the premises.
2. The assessee is required to submit the information.
3. Further drilling down happens, upto transaction level.
4. Issues are found and explanations are sought.
5. If expaliend properly, it is ok.
6. If not, demands are raised.

There are many organisations who provide audit assistance, i.e., pre, post and during audit. It is always better that on receipt of notice for audit, a quick internally arranged audit is conducted to save oneself from the pain that can happen if issues re flagged by the departmental audit team.