Why More Taxpayers May Face Income Tax Scrutiny Notices This Year

Income tax filing is not only a matter of declaring one’s income and filing deductions anymore; now it has become much more of a data matching process.

For the coming year, it is expected that more people will get their notices for scrutiny due to the enhanced capability of the Income Tax Department in using AI and data analysis techniques. The objective is to match the declarations made by taxpayers against known facts.

Based on what a tax expert says, income tax scrutiny today is not random but is mostly based on data. The taxpayer’s declaration in their income tax return gets verified using data available in the AIS database, 26AS Form, TDS, capital gain information, bank interest data, GST data, and government agency data.

For this reason, even a small error can become apparent. In other words, the taxpayer may neglect to declare interest on his savings, fail to mention a particular transaction from the stock exchange, or make a declaration that does not correspond with the GST documentation. Although these could appear to be small mistakes, they can be readily identified using the Income Tax Department’s cross-referencing system.

The government has increased visibility into financial transactions substantially throughout time. Investments, real estate purchases, credit card charges, international travel, stock transactions, and any interest earned have all been reported in different ways.

According to another tax expert, the connected system has made it more transparent than ever before. Financial transactions are now closely linked to income tax returns through multiple reporting mechanisms. As a result, any mismatch between the income reported by a taxpayer and the information available with the Income Tax Department can be automatically flagged, potentially leading to scrutiny or requests for clarification.

Common Mistakes That Can Trigger Income Tax Notices

In many cases, people receive tax notifications because not all sources of income have been reported. This means that, even if a salaried person earns an annual salary of Rs 18 lakhs, there might be another source where he earns Rs 1.2 lakhs from fixed deposits and savings. As banks tend to furnish this information to the tax department, such mistakes are easy to discover.

In addition to the unpaid taxes, failing to report your complete income might also lead to paying interest and, in some situations, facing a penalty equal to 50% of the tax due.

Capital gains are another common trigger for tax notices

In case an individual does not declare profits on sale of stocks, this can be discovered through the analysis of the data, resulting in penalties. Bhuta further warns that non-resident Indians sometimes feel that there is no need to file their income tax returns in India following the sale of property or stocks.

Tax deductions and inconsistencies in turnovers are two more issues which make a tax return subject to examination. Any deductions which lack proper justification, especially those associated with charitable donations to entities which do not have the required documents, might draw a tax examiner’s attention.

Likewise, inconsistencies between the income stated in a tax return and in GST returns would also result in being under tax scrutiny. With all the information becoming interconnected and accessible in the government’s databases, this problem has become easier to track down.

Why AI Is Changing the Game

Another major shift in tax compliance is the use of technology in tax analysis. Today, tax authorities are able to compare the information available in several different databases, thereby making it possible to detect inconsistencies and any irregularities in filing.

As pointed out by the tax expert, having third-party information provided through AIS and GST systems, together with other information made available by market regulators and other government agencies, has tremendously increased the department’s ability to detect mismatches.

A tax notice isn’t always bad news

Taxpayers are told by experts not to be alarmed at receiving such a notice.

To avoid any queries from the tax authorities, taxpayers can reconcile the information provided in AIS, form 26AS, TDS certificates, interest certificates issued by banks, capital gain certificates, and certificates of deductions before filing income tax returns.