Top 5 reasons for receiving income tax notices and how to avoid them

A notice from the Income Tax Department can be stressful, especially because many of us don't know what it entails and what needs to be done in such a situation. According to tax consultants, there has been a spike in the number of income tax notices on assesses. The primary reason is improved monitoring due to KYC norms and online filing of returns. Both of these have made data processing easier and faster. In such a scenario, the scope for non-disclosure or incomplete-disclosure of income, non-filing of income tax returns has become limited. Hence, do not get surprised if you receive a notice from the Income Tax Department seeking details of a transaction or proof of income.

Let’s understand why do you end up receiving an income tax notice and how the same can be avoided.

What is a scrutiny assessment?

The Income Tax Department examines the IT returns filed, and the chances of the information declared by the assessee is incomplete or incorrect. Such cases are taken up for scrutiny assessment. This information is given to the assessee through an issue of income tax notice. The assessee is supposed to take necessary action as communicated by the Income Tax Department.

How are cases for scrutiny selected?

There are basically two types of scrutiny assessment — Compulsory and Manual scrutiny cases. The reasons for manual selection of scrutiny cases can be avoided on the part of the assessee with little care. However, the compulsory screening of cases cannot be prevented.

Following are the top five reasons for receiving income tax notice along with the ways to avoid them.

Reason 1: Non-filing Income Tax Return

Any individual whose income without any deductions (Gross income) is above the exempted limit of Rs. 2,50,000 (for individuals below the age of 60 years) is required to file Income Tax Return every year.

In case you are an Indian resident, and you own a foreign asset or are a signing authority in the overseas bank account, you are required to file your income tax return, irrespective of your annual income.

You need to file an income tax return even if your employer has already deducted TDS from your pay.

• How to avoid: Pay your advance taxes on time and file income tax returns within a specified due date.

Reason 2: Error in TDS

The TDS amount that you show in your income tax return and what is presented on the Traces website might not match. In such case of mismatch, the chances are high that you receive an income tax notice from the Tax Department.

• How to avoid: Inform your employer to deposit the amount with government treasury and file TDS return within the due date.

It is advisable to reconcile the TDS that has been deducted from your income with your statement (Tax Credit Statement – Form 26AS). Highlight the issue if you find any discrepancy.

Reason 3: Non-disclosure of other incomes

You are required to mention each income earned in the financial year in the income tax return. People usually ignore interest income on fixed deposits, savings account, and recurring deposits.

There may be a case where TDS is deducted at a lower rate by the bank, but you fall into a higher tax slab. For example, your bank deducts 10% TDS on interest income earned; however, you fall into tax slab of 20%. In such a case, you might come under the scrutiny of non-disclosure of complete income information in an attempt to minimise your tax liability. You might receive a notice from the Income Tax Department to reconcile your TDS obligations with the bank and get it corrected.

• How to avoid: At the end of the financial year, request your bank to give you interest statement of your fixed deposits, savings account, and recurring account. Report all incomes earned from any source in your income tax return even if such income is exempted from tax.

It is important to note that the penalty for hiding your income can be up to 300% of the tax payable in the financial year. To avoid such huge penalties, it is advisable to contact your bank and employer and get such information rectified.

Reason 4: High-value or unusual transaction

You might receive an income tax notice in case the IT Department find any unusual transaction in your bank account. A transaction value, which is a lot higher considering the disclosure of your income in the income tax return shall be questioned. For instance, you are a salaried individual with a monthly salary of Rs. 10,000, but you deposited your bank account with Rs. 5,00,000. When the tax department notices such transaction, a notice can be expected. All such transactions are reported directly to the income tax department through annual information return filed by banks and broking institutions.

• How to avoid: Show every transaction that you have made in a financial year. Even if it’s a loss, it has to be reported to the tax department to avoid receiving a notice.

Reason 5: Fault in Income Tax Return

An ITR is a statement of income given by the taxpayer to the Income Tax Department. At times, because of lack of knowledge or out of ignorance, people end up filing wrong information in ITR form. Sometimes, they may skip some mandatory information or commit an error in the return form. If the income tax return is not filled accurately, the department may issue a notice to you under Section 139(9) and inform you to file a revised ITR after correcting the error.

• How to avoid: Keep all income-related information ready before filing ITR.

Important points to remember

• Reply on time: Always reply to the income tax department on time, even if you are not able to collect the required information. You may also request for some extra time to prepare the same. It would indicate that you are honest and co-operating with the law.

• Preserve the envelope: If you receive a notice from the tax department, keep it safe. The envelope contains the speed post number, which may work as evidence of its delivery to you and when the same was delivered.

• Get professional help: You can take the assistance of a professional to solve the issue. If the sensitivity of the notice is high, then it is advised to have a Chartered Accountant to represent you.