Let’s understand the word ‘audit’ before understanding what is a tax audit. The dictionary definition of the word ‘audit’ implies it’s an official review of the finances and records of an agency, usually by an independent entity. Often a systematic analysis or examination of something is referred to. There are various forms of audit under different rules, such as business audit / statutory audit carried out under business law regulations, expense audit, stock audit etc. Similarly, an audit called ‘tax audit’ is also required by income tax law.

As the name itself suggests, a tax audit is an inspection or analysis of the accounts of every company or occupation that taxpayers perform from an income tax point of view. It simplifies the income estimation procedure for filing income returns.