Audit Readiness
(Or: "How to survive a tax inspection without needing a Xanax prescription.")
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3.5.1 Maintaining Records (The 6-Year Rule)
Why This Matters:
The Income Tax Act requires you to preserve financial records for 6 years. Lose them, and you lose deductions, invite penalties, and risk prosecution.
💡 What to Preserve (and How)
Document Type Storage Method Pro Tip
Purchase/Sales Bills Digital + Physical Use Google Drive + Fireproof Safe
Bank Statements Password-protected PDFs Download monthly (banks purge after 7 years)
Salary Records Encrypted cloud storage Include signed employee copies
GST Invoices GSTN backup + physical Tag with HSN codes for easy retrieval
🔥 Horror Story:
A Hyderabad trader threw away 5-year-old bills, then faced a scrutiny assessment. Without proof of ₹28L in expenses:
• Disallowed deductions → ₹8.4L extra tax
• Penalty → ₹2.5L
• 3 years of extended audits
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3.5.2 Handling Surprise Inspections
When the Taxman Comes Knocking
📋 Immediate Response Protocol
1. Stay Calm
o Offer water/tea (but no documents yet)
o Politely ask for:
✅ Inspection notice
✅ Officer's ID card
2. Call Your CA Immediately
o Script: "We’ll cooperate fully, but our advisor handles this."
3. Controlled Access
o Designate one room for inspection
o Never let them roam freely (seen cases where officers peeked at competitor data)
💼 What They Can/Cannot Do
Allowed Not Allowed
Verify original bills Take documents away
Check inventory Access personal emails
Question staff (with CA) Demand "unofficial payments"
💀 Nightmare Scenario:
A Mumbai restaurateur let inspectors "borrow" his laptop for "verification." It returned wiped clean—6 years of data gone.
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🛡️ Audit-Proofing Checklist
"How ready are you?"
Parameter 😱 Sitting Duck 🛠️ Partly Ready 🛡️ Fort Knox
Document Organization Shoebox of crumpled receipts Digital scans but no index Year-wise, category-wise digital-physical archive
Surprise Inspection Plan Panic and call dad CA on speed dial Mock drills twice a year
Compliance Gaps Multiple unfiled returns Minor mismatches Zero discrepancies last 3 years
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🚨 Crisis Response Playbook
"When the tax squad arrives unannounced:"
Situation Do This Never Do This
Officer demands old records Provide only requested year Volunteer extra documents
Pressure for "settlement" "Our CA handles all payments" Offer even ₹1 unofficially
Inventory verification Have stock list ready Let them count unsupervised
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📌 Founder's Audit Survival Kit
1. The 3-Envelope System
o Red Envelope: Original bills for current year
o Blue Envelope: Digital backups (2 separate drives)
o Black Envelope: Sensitive documents (keep offsite)
2. The CA Shield
o Retainer agreement should include 24/7 audit support
o Pre-agreed fee structure for inspection days
3. The Decoy Laptop
o Keep a clean device with only audit-relevant files
o Use Windows Sandbox for temporary access
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🎯 Final Thought
"An audit isn't about if—it's about when. The prepared founder pays taxes. The unprepared one pays taxes + penalties + bribes + legal fees + stress-induced medical bills."
