What to do if income tax is selected for audit?

Many taxpayers are apprehensive about income tax audits. After submitting an income tax return, many often wonder, “Will my return be selected for audit?” They fear that an audit may lead to inconvenience or unnecessary harassment.

This year, the National Board of Revenue (NBR) has selected 100,000 taxpayers' income tax returns for audit in three phases.

Tax officials selected the returns through an automated system for reviewing taxpayers' records. It is important to note that the selection covers returns submitted for the 2023–24 fiscal year.

You submitted your income tax return on time and in accordance with the rules. However, the NBR will conduct an audit to verify whether the information provided in your return is accurate.

The tax authority had suspended audits for the past few years but resumed the process in the previous fiscal year.

It is important to remember that an income tax audit is not a punitive measure. It is a routine verification process within the tax administration.

Accurate information, properly maintained records, and timely responses are your greatest strengths during an audit.

As a taxpayer, if you understand your rights and responsibilities, you do not need to feel unnecessarily concerned about an audit.

With that in mind, here are answers to some common questions about income tax audits:

An income tax audit is a process through which the tax authority under the National Board of Revenue (NBR) verifies the information declared in a taxpayer's return, including income, expenditure, assets, liabilities and tax payments, by comparing it with supporting documents.

No. Selection for an audit does not imply an allegation of tax evasion. It may simply form part of the tax authority's routine verification process.

The NBR may select any taxpayer's return for audit. The tax authority uses an automated system to choose returns for review. However, significant inconsistencies between income and expenditure, high-value transactions, unusual tax relief claims or discrepancies in the information provided may trigger a special audit.

Read the notice carefully. Check what information or documents the authority has requested, the submission deadline and where you need to submit them. Prepare the required documents within the specified time. If necessary, consult your income tax lawyer.

The tax authority commonly requests the following documents during an income tax audit:

1. Income tax return and tax computation.

2. Salary or income certificate.

3. Bank statements.       

4. Tax Deducted at Source (TDS) certificates.

5. Business accounts, where applicable.

6. Documents relating to assets and investments, including the purchase of flats, land, vehicles and other assets.

7. Documentary evidence of loans or liabilities.

You may need to do so if the circumstances require it. In many cases, submitting written explanations and supporting documents is sufficient. However, you may also need to attend a hearing if the tax authority requests one. If there is no such requirement, it is generally better not to arrange a meeting unnecessarily.

If you do not respond within the prescribed deadline, the tax authority may take further action in accordance with the law. Therefore, you should always respond on time.

Not in every case. The tax authority will first give you an opportunity to explain the issue. If your explanation and supporting documents satisfy the authority, it may resolve the matter without imposing any penalty.

If the tax authority determines that you owe additional tax, it will explain the reasons for its decision. Under the law, you may either pay the assessed amount or appeal against the decision.

Yes. The law allows taxpayers to appeal against an audit decision by following the prescribed procedure and submitting the appeal within the specified time limit.