Why Is Tax Audit Important?

Tax is a compulsory payment levied by the government on an organisation or individual to raise revenue for public needs. The collected amount is then utilised for various public expenditure programmes. Taxes are essential for every country.  The critical function of tax is to accrue funds for the functioning of government and its multiple types of machinery. Tax audit is the process by which the government of one country tries to analyse the responsibility to pay taxes by a company. It is a review of the income generated by the business. Through a tax audit, the government ensures compliance with various taxation laws by an organisation. Checking the internal transactions, finding the accuracy of the book of accounts, ensuring the authenticity and validity of the transactions and confirming the assets and liabilities are the objectives of the tax audit.

What Is a Tax Audit?

Tax Audit is the process of understanding the financial status of an organisation. It includes assessing the accounting principles and the strategies incorporated by the business enterprise. Tax audit is a kind of tracking and recording of financial transactions. It is a logical, systematic and structured process.

There mainly four kinds of tax audit:-

1.Correspondence Audit

It is the least severe type of tax audit. This kind is used to audit those involving a small amount of money. It is carried to check and verify the accuracy of the tax returns.

2.Office Audit

Office Audit is carried out when the tax returns are too complex for a correspondence audit. This type of audit has more issues and is more detailed. The Tax Authority questions about the employment and financial position of the organisation.

3.Field Audit

Field Audit is a complex and serious kind of tax audit. It involves the tax audit agents visiting the taxpayer’s home or place of employment. The skilled tax agents notice things which are not reported in the tax returns.

4.Random Audit

Random Audit is a technique used by the Internal Revenue Service(IRS) to select the taxpayers to audit randomly. The taxpayers will not know about the audit in advance. It is carried out to avoid cheating and evading tax.

Tax Audit in Dubai

The Federal Tax Authority is the authority responsible for managing and collecting federal taxes and distributing tax-generated revenues. Following is to be complied for tax audit in Dubai:-

• The Federal Tax Authority conducts an audit and checks returns of a company whenever it seems fit to do so.
•  FTA issues notice to the company at least five days before the intended date of the audit. The notice contains particulars such as place, audit schedule, involved parties and reasons (if any).
• The auditors and the company meet at the prescribed place, and the auditors ask for the business records and other details.
• FTA conducts audit only on working hours other than the exceptional situations.
• The company should provide full assistance to the auditors along with their tax agents and legal representatives. The FTA has the full authority to order for re-audit in case of any suspicion.
• The business owners have the right to be present during the audit procedures.
• The FTA can review and verify the tax declarations.
• After the completion of the FTA tax audit, the auditor issues an audit report which contains the findings and recommendations.

7 Reasons to Implement a Tax Audit?

There are several reasons to implement a tax audit. Among them, following are the most important:-

1. Documentation is an essential aspect of the tax audit. Tax audit helps in maintaining a book of accounts and other records of revenue and expenditure properly. Accurate accounting and bookkeeping make an efficient tax audit.
2. Tax Audit ensures that income and expenditure are clearly and entered adequately by business owners. It scrutinises the claims of deduction and avoids fraudulent practices.
3. Tax Audit identifies a weakness in an accounting system and recommends modification to the system.
4. The published audit reports show the transparency of an organisation. Thus it imparts credibility to the business among employees, customers, investors and tax authorities.
5. The audit makes the management aware of the business risks and the potential means of solving it.
6. Through auditing, companies get a clear idea about their financial status, which helps in the future expansion of the business.
7. An audit provides greater confidence to the shareholders and investors. According to them, audited financial records are more reliable than unaudited records.

How Does JAXA Help You?

JAXA Chartered Accountants specialize in providing customised solutions in audit, bookkeeping, tax and accounting. JAXA helps business owners and entrepreneurs to deal with their business.  Our tax consultants help in reviewing the company and provide feedback for business strategies adopted by the company. Our tax experts help to comply with the tax requirements and make the company ready to face the tax audit at any time. Don’t hesitate to contact us for all tax and accounting related services. Our experts are prepared to assist you.