Selected for tax audit: what taxpayers should know

For many taxpayers in Bangladesh, receiving notice that an income tax return has been selected for audit can cause immediate anxiety. The word “audit” is often interpreted as an allegation of tax evasion, a sign of inevitable additional tax liability, or the beginning of a prolonged dispute with the tax authorities.

Such concerns are understandable, but an audit should not automatically be viewed as a presumption of wrongdoing. It is primarily a verification process through which the tax authority examines whether the income, expenditure, assets, liabilities, investments and financial transactions disclosed in a return are accurate, consistent and supported by appropriate evidence.

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The issue has recently gained greater public attention following the National Board of Revenue’s selection of more than 90,000 income tax returns filed for the 2023–24 assessment year for audit through an automated random-selection process.

At the same time, the NBR warned taxpayers that fraudsters had been contacting individuals by telephone, falsely claiming that their returns had been selected for audit and demanding money in exchange for removing their names from the audit process.

Audit Framework under the Income Tax Act 2023

Section 182 of the Income Tax Act 2023 sets out the legal framework for the audit process. Under Section 182(4), after receiving the list of returns or revised returns selected or approved for audit, the Deputy Commissioner of Taxes is required to inform the concerned taxpayer of the reasons for conducting the audit.

Where the audit reveals that the taxpayer’s compliance, income, expenditure or assets have not been properly reflected in the return, Section 182(5) requires the Deputy Commissioner of Taxes to send the audit report to the taxpayer. A notice may also be issued directing the taxpayer to submit a revised return, together with relevant written explanations and supporting evidence.

If the revised return properly reflects the audit findings and the resulting tax and other applicable amounts are paid in full, the Deputy Commissioner of Taxes may accept the revised return and formally notify the taxpayer that the audit has been concluded.

However, if the revised return, explanations or evidence are not satisfactory, or if the taxpayer fails to comply with the notice, the Deputy Commissioner of Taxes may proceed with an assessment under Section 183 or Section 184, as applicable.

The law also imposes a time limit. A return or revised return must be selected or approved for audit within two tax years from the end of the tax year in which the return was filed.

Verifying the Notice Before Taking Any Action

The first responsibility of a taxpayer is to confirm that the audit communication is genuine. A telephone call, text message, social media message or communication from an unknown personal email address should not be treated as an official audit notice.

A genuine notice should be issued through the appropriate tax authority and should clearly mention the relevant assessment year, the issuing tax circle, the documents required, and the deadline for submission under Section 183(3) of the Income Tax Act 2023. Taxpayers should verify the notice directly with the relevant tax office before responding or providing any documents.

Any demand for immediate payment through a personal bank account or mobile financial services such as bKash, Rocket or Nagad should be treated as suspicious. Taxes, penalties and other government dues must be paid only through approved challans or authorised payment systems. Suspicious communications should be reported, and all related messages, telephone numbers and payment requests should be preserved as evidence.

Preparation Is More Effective Than Panic

Once the authenticity of the notice has been confirmed, the taxpayer should begin preparing a complete and organised response. The relevant return should be reviewed carefully, and every material disclosure should be compared with the supporting records.

Individual taxpayers may need to gather salary certificates, bank statements, tax-payment challans, withholding tax certificates, investment documents, savings instruments, property deeds, loan agreements, gift records, cost details relating to lifestyle, rental statements, and statements of assets and liabilities. For business taxpayers, the process is generally more extensive. Sales and purchase records, invoices, inventory statements, bank transactions, expense vouchers, VAT records and financial statements should be reconciled with the figures reported in the income tax return. Any inconsistency between the return and the underlying records may lead to further questions. Taxpayers should therefore identify possible discrepancies before submitting their response and prepare clear explanations supported by reliable documents.

Bank transactions are frequently a major area of audit scrutiny. However, every deposit into a bank account does not necessarily constitute taxable income. A deposit may represent a transfer between the taxpayer’s own accounts, loan proceeds, proceeds from the sale of an asset, repayment of an advance, a legitimate gift or savings accumulated in earlier years. Nevertheless, an explanation without supporting evidence is unlikely to carry sufficient weight.

The taxpayer should prepare a reconciliation of significant transactions, identify the source of each amount, and provide supporting documentation. Large or unusual deposits should be explained separately, particularly when they do not correspond directly with the income disclosed in the return.

A Proper Audit Response Must Be Written and Documented

An effective audit response should be clear, organised and evidence-based. Each question raised in the notice should be answered in the same sequence in which it appears. Supporting documents should be numbered and accompanied by an index. The taxpayer should retain a complete copy of everything submitted, together with evidence of the date and manner of submission.

Preliminary audit observations should also be reviewed carefully. Where a finding results from incomplete information, a misunderstanding of a transaction or an incorrect assumption, the taxpayer should respond with a precise explanation, accurate calculations and supporting evidence.

A general statement of disagreement is rarely sufficient. The taxpayer should identify the disputed amount, explain why the proposed treatment is incorrect, state the correct figure and refer to the documents supporting that position.

At the same time, an audit should not be prolonged merely to avoid acknowledging an obvious error. Where the return contains a genuine omission, computational mistake or incorrect disclosure, corrective action should be taken promptly in accordance with the law. Depending on the circumstances, this may involve filing a revised return, paying additional tax and settling other applicable liabilities.

Do Not Ignore Official Communications

Taxpayers sometimes fail to receive genuine notices because they have changed their residential or business address without updating their information with the tax authority. Consequently, a notice may be delivered to an earlier address without coming to the taxpayer’s attention. Taxpayers should therefore ensure that their current address and contact information are properly recorded. Keeping these details updated can prevent missed deadlines and unnecessary legal complications.

Ignoring a valid notice is one of the most damaging responses a taxpayer can make. Failure to reply, refusal to provide documents, or repeated absence may lead to reassessment, penalties, additional tax liability or further legal proceedings. Silence does not protect the taxpayer; it usually weakens the taxpayer’s position.

Professional Advice May Be Necessary

Professional assistance may be appropriate in cases involving business accounts, foreign income, inherited property, family loans, property transfers, multiple bank accounts, or substantial investments. A qualified tax practitioner, chartered accountant or lawyer can assist in reviewing records, preparing reconciliations and presenting the taxpayer’s position effectively. Nevertheless, taxpayers should not surrender complete responsibility to an adviser. Every taxpayer should understand the contents of the return filed in their name and be able to explain the sources of major income, assets and financial transactions.

Fairness Is a Shared Responsibility

Tax administration also carries important responsibilities. Audit queries should be specific, deadlines should be reasonable and taxpayers’ explanations should be considered objectively. Every discrepancy should not automatically be treated as deliberate concealment. Effective tax enforcement requires firmness, but it also requires transparency, proportionality and respect for due process. A fair and professional audit system can strengthen voluntary compliance and public confidence. An arbitrary or intimidating process can produce the opposite result.

A tax audit should ultimately be understood as an opportunity to establish the accuracy of a return. For taxpayers whose disclosures are complete and properly documented, it is an opportunity to demonstrate compliance. For those who identify genuine mistakes, it provides an opportunity to correct them before the consequences become more serious. The appropriate response to an audit notice is therefore neither fear nor avoidance. It is timely preparation, proper documentation, professional conduct and confidence in verifiable facts.

The writer is a financial sector analyst. He can be reached at faysal.aqc@gmail.com