Top 5 Reasons for Receiving Income Tax Notices and How to Avoid Them!

Receiving a tax department notification may be a nightmare. Learn when you could get an income tax notice, why you might, and how to avoid it.

A letter from the Income Tax Department may be distressing, mainly because many of us are unaware of what it means and what must be done in such a circumstance. According to tax advisors, the number of income tax notifications sent to taxpayers has increased. The fundamental cause is enhanced supervision due to KYC requirements and online return filing.

Both of these have simplified and accelerated data processing. The scope for non-disclosure or inadequate disclosure of income and non-filing income tax returns has been restricted in such a circumstance.

As a result, don't be shocked if you get a notification from the Income Tax Department requesting information about a transaction or evidence of income. Let's look at why you could get an income tax notice and how you might prevent it.

What is an Income Tax Notice?

The income tax notification is a legal document that the Income Tax Department uses to communicate with taxpayers. It might be a simple hint or a demand for further information, tax payment, or anything else.

Receiving an income tax notification does not necessarily signal that the recipient is in danger. It may also be provided to offer information about any excess tax paid by you or to seek the submission of further documentation. As a result, it is critical to comprehend why an income tax notification was issued in the first place.

What Exactly is a Scrutiny Assessment?

The Income Tax Department evaluates IT returns submitted, and there is a possibility that the information stated by the assessee is missing or erroneous. Such incidents are investigated and evaluated.

This information is sent to the taxpayer through an income tax notice. The assessee is required to perform the actions specified by the Income Tax Department.

How Are Instances For Review Chosen?

There are two sorts of scrutiny cases: compulsory and manual scrutiny cases. The causes for manual selection of scrutiny cases may be avoided with minimal attention on the assesses side. However, mandatory case screening cannot be avoided.

The top five causes for obtaining an income tax notice and how to prevent them are listed below

Reason 1: Failure to File an Income Tax Return

Any person whose gross income (before deductions) exceeds the exemption limit of Rs. 2,50,000 (for people under 60) is obliged to submit an Income Tax Return each year.

Suppose you are an Indian resident, possess a foreign asset, or are a signing authority in an overseas bank account. In that case, you must submit an income tax return regardless of your yearly income.

Even if your employer has already deducted TDS from your salary, you must submit an income tax return.

How to avoid: Pay your advance taxes on time and submit your income tax returns on the due date.

Reason 2: TDS Error

The TDS amount shown on your income tax return and the amount shown on the Traces website may differ. In such a mismatch scenario, you will likely obtain an income tax notification from the Tax Department.

How to avoid: Inform your employer that the sum must be deposited with the government treasury, and a TDS return must be filed by the due date.

It is recommended that you reconcile the TDS deducted from your income with your statement (Tax Credit Statement – Form 26AS). If you identify a discrepancy, highlight it.

Reason 3: Failure to Disclose Additional Sources of Income

Each income obtained during the fiscal year must be reported on the income tax return. Most people disregard interest income from fixed deposits, savings accounts, and recurring deposits.

The bank may deduct TDS at a lesser rate, but you may fall into a higher tax bracket. For example, your bank deducts 10% TDS on interest income; nevertheless, you are subject to a 20% tax rate.

In such a circumstance, you may face scrutiny for failing to provide accurate income details to reduce your tax burden. You may get a notification from the Income Tax Department requiring you to balance your TDS liabilities with the bank and fix them.

How to avoid: Request an exciting statement for your fixed deposits, savings, and recurring accounts from your bank after the fiscal year. Report all income obtained from any source on your income tax return, even if it is tax-free.

It should be noted that the penalty for concealing your income may be up to 300% of the tax due in the fiscal year. To prevent such severe fines, you should contact your bank and employer and get such information corrected.

Reason 4: Expensive or Unexpected Transaction

If the IT Department discovers unexpected transactions in your bank account, you may get an income tax notification. A transaction value much larger than the amount disclosed in your income tax return will be challenged.

For example, suppose you are a salaried employee earning Rs. 10,000 per month but depositing Rs. 500,000 into your bank account. A notification may be anticipated if the tax agency detects such a transaction. All such transactions are immediately reported to the income tax authorities via yearly information returns submitted by banks and brokerage firms.

What to avoid: Display every transaction you made throughout a fiscal year. Even if it is a loss, it must be reported to the tax agency to prevent a notice.

Reason 5: Incorrect Income Tax Return

An ITR is a statement of income the taxpayer provides to the Income Tax Department. People can file incorrect information on ITR forms due to a lack of expertise or ignorance. They may sometimes omit the required information or make mistakes in the return form.

If you do not fill out the income tax return correctly, the department may send you a notice under Section 139(9) and instruct you to submit a revised ITR after fixing the problem.

What to avoid: Before submitting an ITR, gather all income-related documentation.

Conclusion

You should not be alarmed if you get an income tax notification. You must determine the basis for the information and take the necessary steps to fulfil it. You can submit the required paperwork or refile the returns after making the necessary revisions.

If you have been requested to appear in front of a tax official when submitting returns, you should do so or delegate the issue to a tax professional. They must have legal power of attorney. If you believe the warning is incorrect, you must reply adequately and provide the required documentation. It is essential to respond to notifications, or else the penalty and interest will continue to accrue.

Incorrect return filing is a crime. You might face fines or perhaps incarceration. Ignoring income tax notifications costs time, money, and effort over time. As a result, you must submit your taxes accurately and react to any income tax letters promptly.