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ICAI plans guidelines to control gaps in audits

January 12, 2023

Accounting rule maker Institute of Chartered Accountants of India (ICAI) will soon issue new instructions to professionals to make tax audits more watertight.

First, the Institute will issue specific guidance on tax audits of charities at the end of this month or early next month, followed by another guidance on tax audits in general, with changes to the reporting obligations and formats that could enter the Union budget , said a person familiar with the development.

The guidance for charities is important given that the Income Tax Department has tightened reporting requirements for these charitable organizations receiving tax exemptions.

The government does not want these structures to be used to abuse the tax exemptions given to genuine charitable organizations.

Trusts’ income from property held for charitable or religious purposes and voluntary contributions received for these purposes are tax-exempt under the Income Tax Act, subject to equestrians.

As part of their tax returns, charities must file their audited accounts.

If the trust’s total income exceeds the basic exemption limit, a tax audit is required.

The accompanying note contains do’s and don’ts for auditors.

“The guidance note will contain suggestions from supervisors and is not only intended for chartered accountants. The tax authorities are also counting on it,” said the person quoted above.

A second guidance on tax audits in general may come after the Union’s budget for FY24, keeping auditors abreast of legislators’ expectations.

In recent years, the IRS has tightened regulatory oversight of trusts claiming tax exemption.

In addition to the tax audit report, these entities must provide detailed information about their religious or charitable purpose, whether they have undergone changes, sources of income and their use, and whether or not the conditions for tax relief have been met.

Trusts must also report details of their beneficial owners.

Detailed reporting will help tax officials ensure that only those entities that meet the conditions and have used resources for their specified purpose are granted the tax exemption.

The focus of the tax authorities, as well as the accountant, will be on the goals of the institution, the source of resources and their use.

In recent years, the IRS has conducted searches in several states, including Maharashtra, Karnataka, Tamil Nadu and West Bengal, investigating cases of alleged diversion of funds from educational institutions run by tax-exempt trusts.

Tax audits help taxpayers verify the authenticity of the exemption application and ensure that the conditions are met.


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