The Federal Board of Revenue (FBR) has chosen an unconventional new approach to tax audits. In a key policy move, the FBR has decided to discontinue the practice of choosing cases for audit via computerized random balloting. Instead, it will delegate this critical responsibility to the Commissioners of Inland Revenue.
This decision follows the failure of the FBR earlier audit technique, which used random selection. The random balloting technique often resulted in the selection of irrelevant cases, giving both taxpayers and tax officials difficulty. Even situations that did not justify an audit were sometimes picked, resulting in needless legal fights.
The choice to delegate audit selection to field Commissioners, who have firsthand experience dealing with taxpayers, is considered more realistic. These Commissioners may utilize their experience to identify situations that really warrant auditing, resulting in a more focused and efficient procedure.
Certain portions of the Finance Act 2022 will not apply to people whose income tax affairs have been audited in any of the previous four tax years. In extreme circumstances, the Commissioner may still designate a person for audit with the Board’s permission.
This shift in the audit approach was first advocated by former finance minister Shaukat Tarin. Third-party audits were proposed, including the selection of 22,458 income tax audit cases for third-party investigation. The procedure was to be carried out in line with the Public Procurement Rules, 2004, with third-party auditors chosen in accordance with the Income Tax Ordinance, 2001.
According to this legislation, the FBR has the right to employ chartered accountants or cost and management accountants on a case-by-case basis to perform income tax audits.