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Income Tax Notices on the Rise: Reasons Behind the Surge and How to Respond Effectively

Sahil Jaiswal , Last updated: 18 September 2024  
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Income tax notices have been on the rise in recent years due to several key factors. 

Understanding why these notices are being issued more frequently and how to respond effectively can help taxpayers manage their tax compliance better. Here's a breakdown:

Reasons Behind the Surge in Income Tax Notices

Improved Technology and Data Analytics 

Tax authorities are increasingly using advanced data analytics, artificial intelligence (AI), and machine learning to detect discrepancies in tax filings. Cross-referencing information from various sources (such as bank statements, investment records, and transactions) helps in spotting inconsistencies and under-reporting of income more efficiently.

Income Tax Notices on the Rise: Reasons Behind the Surge and How to Respond Effectively

Expanded Reporting Requirements 

There is an expansion in third-party reporting requirements. Banks, mutual funds, and financial institutions are required to report high-value transactions (e.g., large deposits, withdrawals, or investments) to tax authorities. These reports trigger notices when there is a mismatch with the income reported in tax returns.

Increase in Digital Transactions

The government's push towards a cashless economy has led to increased monitoring of digital payments and transactions. If the volume of digital transactions is not aligned with the reported income, it may trigger a notice.

Tightening of Tax Compliance

Governments worldwide, including India, have been tightening tax compliance frameworks. This involves targeting areas like unaccounted money, shell companies, and tax evasion. This proactive approach results in a larger number of tax notices being issued to individuals and businesses alike.

Non-Disclosure of Foreign Assets or Income

Failure to disclose foreign income or assets has led to an uptick in notices. Global data-sharing agreements between countries allow tax authorities to track overseas income more easily.

Mismatch in TDS or Tax Credits (Form 26AS or AIS)

Taxpayers may receive notices due to mismatches between the Tax Deducted at Source (TDS) claimed and what has been reported by employers or banks. The introduction of Form 26AS and the Annual Information Statement (AIS) allows tax authorities to verify these details instantly.

Errors in Tax Returns

Simple mistakes in filing returns—such as incorrect deductions, missing information, or errors in computation—often trigger scrutiny and result in notices.

 

Types of Income Tax Notices

Notice Under Section 139(9)

Issued for defective or incorrect returns.

Notice Under Section 143(1)

A preliminary assessment of the return, which may show any discrepancies.

Notice Under Section 143(2)

Issued for scrutiny or detailed assessment.

Notice Under Section 148

Issued for reassessment when income appears to have escaped assessment.

Notice Under Section 245

Adjustment of refunds due to outstanding tax demand from previous years.

How to Respond Effectively

Carefully Review the Notice

Each notice will specify the reason it has been issued. Understand whether it's a demand for additional tax, a mismatch in details, or a request for more information.

Check the Timeframe for Response

Most notices come with a deadline for response. Ensure that you respond within this period to avoid penalties or further legal complications.

Cross-Verify Your Financial Data

Cross-check the data mentioned in the notice with your tax filings, Form 26AS, AIS, and bank statements to identify discrepancies. This will help in formulating an accurate response.

Correct and File a Revised Return (if applicable)

If errors or omissions are found, file a revised return. For instance, if the TDS claimed does not match with Form 26AS, updating this information may resolve the issue.

Consult a Tax Expert or Chartered Accountant

If the issue is complex, such as notices regarding reassessment or foreign income, consult a tax professional to avoid errors in responding.

Respond Online

The Income Tax Department offers an e-filing portal for submitting responses to notices. Use the portal to avoid delays and ensure your response is recorded.

Prepare for Scrutiny (if applicable)

If you’ve received a scrutiny notice, gather all necessary documents (like proof of income, deductions, or investments) to defend your case. It's essential to provide accurate information.

Keep Documentation Ready 

Maintain proper records of your financial transactions, investments, and past tax filings. Having the correct documentation will make it easier to address any issues highlighted in the notice.

 

Avoiding Future Notices

File Accurate Returns

Ensure accuracy when filing, and avoid last-minute rushes that might result in mistakes.

Monitor Your Form 26AS

Regularly check Form 26AS and AIS to ensure there are no discrepancies with your financial data.

Disclose All Sources of Income

Disclose income from all sources, including foreign assets, investments, and freelance work, to avoid mismatches.

Seek Professional Help

Engaging with a tax advisor can help with accurate filing and addressing any potential red flags before submission.

Understanding the reasons behind the surge in tax notices and responding effectively can help in avoiding complications and ensuring smooth tax compliance.

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Published by

Sahil Jaiswal
(Article Assistant)
Category Income Tax   Report

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