Commonly Found Irregularities in Tax Audit Report (Form 3CA/3CB/3CD)

Tax audit under Section 44AB serves to ensure correctness of financial reporting, compliance with income tax laws, and transparency. Irregularities appear due to inadequate documentation, misinterpretation of law, manual errors, system limitations, and evolving statutory requirements. These may lead to notices, penalties, litigation and reputational risk.

1. Structural irregularities

• Incomplete or incorrect basic information — incorrect/mismatched PAN, wrong assessment year, incorrect business codes, wrong selection of Form 3CA vs 3CB.
• Use of inconsistent accounting frameworks — undisclosed shifts in accounting policies or hybrid methods causing inconsistency between audit report and financial statements.

2. Non-compliance with Section 44AB

• Incorrect determination of audit thresholds — miscalculation of turnover in speculative transactions, derivatives, e-commerce or composite businesses.
• Delay in conducting or completing audit — late filings, missing reconciliations, and unrecorded year-end adjustments.

3. Turnover & revenue reporting (Clause 31)

• Understatement or overstatement of turnover due to unreconciled GST, ignored discounts/credit notes, misclassification of exports.
• Misreporting digital & e-commerce transactions — unreconciled payment gateway settlements, platform charges and TCS omissions.

4. Depreciation (Clause 18)

• Wrong classification of assets; failure to apply proportionate/half-year rates; non-reconciliation between tax and book depreciation.

5. Loans, deposits & cash transactions

• Non-reporting of cash loans/deposits above prescribed limits; improper disclosure of related party transactions.

6. TDS/TCS reporting (Clause 34)

• Mismatch between TDS returns and books, incorrect sections, incomplete TCS reporting and unreconciled Form 26AS data.

7. Inventory valuation (Clause 14)

• Inconsistent valuation methods, incorrect treatment of obsolete stock, inadequate year-end verification.

8. GST reconciliations

• Mismatches between GST turnover and income-tax turnover, differences in ITC claimed and revenue recognition, incomplete GSTR-9 reconciliations.

9. Disallowances (Clause 21)

• Failure to add back disallowed expenses under Section 40(a)(ia), incorrect treatment of payments to related parties under Section 40A(2)(b), non-reporting of cash payments beyond thresholds.

10. Inconsistency between Form 3CD and financial statements

Contradictions between Form 3CD data and audited financials, or notes to accounts, create significant assessment risk and undermine audit credibility.

Recommended controls

• Conduct month-wise reconciliations for income, expenses, GST, TDS and turnover.
• Maintain robust documentation — invoices, agreements, ledgers, reconciliation schedules and management representation letters.
• Strengthen internal controls: approvals, vendor verification and segregation of duties.
• Use automation but apply manual analytical review to ERP outputs.
• Ensure senior review and timely communication between auditor and client to prevent last-minute adjustments.

Consequences

Irregularities can trigger notices, penalties, disallowances, increased risk of future assessments and damage to both taxpayer and auditor credibility.

High-quality tax audit reporting requires accuracy, clear disclosures, reconciliations and oversight. In an environment increasingly dependent on data analytics and cross-verification, precision is indispensable for sustainable compliance.