Top Reasons Why You Can Get An Income Tax Notice

Receiving an income tax notice can be daunting for anyone, whether you're a seasoned business owner or a new taxpayer. The Indian Income Tax Department issues notices for various reasons, ranging from routine verifications to discrepancies in tax filings. Understanding the common triggers for these Income Tax notices can help you stay compliant and avoid unnecessary stress. Here's an exploration of the top reasons why you might find an income tax notice in your mailbox. IndiaFilings experts can help you craft and submit your response if you've received an income tax notice. [shortcode_98]

Income Tax Notice

An Income Tax Notice is an official communication sent by the Income Tax Department to taxpayers for various reasons related to their income tax account or filings. It can serve multiple purposes, such as seeking additional information, clarifying discrepancies in tax returns, informing about pending dues, or initiating audits or investigations. These notices are part of the department's enforcement and compliance measures to ensure accurate reporting and timely payment of taxes.

Reasons For Which You Can Receive an Income Tax Notice

You have already paid your entire tax bill. You have faithfully filed your tax returns. What should you do if you receive an Income Tax Notice? Do not worry; we will discuss the same in this section. Let's see for which reasons you might receive an IT notice-

Incorrect Reporting of Income or Assets in Your Tax Return

The Income Tax Department is intensifying efforts to curb the circulation of undeclared wealth. You could be issued a notice to provide a comprehensive account of your income and assets, both domestically and internationally. It's also critical to meticulously fill out your tax return, ensuring details like your name, address, and PAN are accurate. Any discrepancies in these particulars could trigger an alert, leading to a notice from the department.

Mismatch Between Reported and Actual Income

If the income tax authorities detect discrepancies between your reported income and income from various sources, you could receive a notice for failing to disclose all your income.
To avoid issues related to underreporting income, compile and review all relevant financial documents, such as salary slips, bank statements, invoices, etc., before submitting your income tax return.

Significant Changes in Investment Patterns, High-Value Transactions, or Fluctuations in Income

The tax department remains vigilant for abrupt declines or sharp increases in income levels, closely monitoring such financial dynamics. If you significantly acquire high-value properties or assets or your bank account reflects numerous high-value transactions, you may attract the income tax department's attention and receive a notice. Additionally, substantial investments made in the names of your spouse or children are considered part of your income and should be included in your total taxable income calculation. Failure to report such income on your tax returns could lead to receiving a notice from the tax authorities.

Due to Incorrect TDS Claims

The Tax Deducted at Source (TDS) claimed in your Income Tax Return (ITR) should match the TDS entries in Forms 26AS and 16 or 16A. If inconsistencies are found, you may receive a notice under Section 143(1) of the Income Tax Act. Entities such as your employer, the bank where you hold fixed deposits, or the issuer of any bonds you've purchased are responsible for deducting TDS on your behalf. Therefore, if discrepancies in the TDS amounts are deducted compared to your reported income and interest, the tax department will likely issue a notice to address these errors.

For Scrutiny and Detailed Assessment

Receiving a notice under Section 143(2) indicates that the tax authorities thoroughly examine the Income Tax Return (ITR) you submitted. This scrutiny often stems from various factors, including inconsistencies or inaccurate reporting in your tax filings. It's important to know that the Income Tax Department may impose penalties for discrepancies found during their review. Therefore, addressing and responding to such notices promptly and with the necessary documentation to clarify any issues is crucial.

Late Filing of Income Tax Returns

It is imperative to file your income tax return by the specified deadline for each assessment year. If the deadline for ITR filing is near and you haven't filed yet, the tax department may send you a reminder. If you miss the deadline, a notice under Section 142(1)(i) of the Income Tax Act requiring you to furnish your return can be issued. It's important to note that paying your taxes and filing your tax return are separate actions. Thus, even if you've paid your taxes but haven't filed your return, the department might issue an ITR notice. Filing tax returns is mandatory, even if your business incurred losses during the financial year. While many people file their returns online, the process doesn't end with the upload. You have 120 days post-upload to verify your ITR. Some individuals file their tax returns past this deadline, which can lead to penalties. In such cases, you might receive a notice from the Income Tax department urging compliance and prompt action to rectify the oversight.

Adjustment of Refunds Against Outstanding Liabilities and Taxes Due

You might overlook declaring certain interest income accrued to you. The tax department can easily trace this oversight because such interest is credited to your bank account or reinvested. Consequently, you might receive a notice for the non-payment of taxes on this income. In cases where you are entitled to a refund from the Income Tax Department but also have outstanding taxes or other dues, the assessing officer may issue a notice. This notice would inform you that any refunds due to you will be adjusted against the outstanding amounts you owe, effectively reducing the refund amount by the sum of your liabilities.

For Instances of Past Tax Evasion

The Income Tax Act grants the Income Tax Department authority to reassess previously filed tax returns. The department might notify a taxpayer under section 147 of the Income Tax Act. An Assessing Officer can select tax returns for such reassessment, following specific criteria. A notice for reassessment is typically issued only if the tax officer has reasonable grounds to believe that certain income, which should have been subject to tax, was not assessed in the past.

Inaccuracies in Reporting Long-Term Capital Gains from Equity

When filing your Income Tax Return (ITR), it's crucial to accurately report any realized long-term capital gains (LTCG) from listed equity and equity-oriented mutual funds. LTCG over Rs 1 lakh in a fiscal year from investments on which Securities Transaction Tax (STT) has been paid will be taxed at 10%. Since the 2018-19 financial year, reporting LTCG from equity has become more complex, requiring careful attention to detail. Errors in LTCG reporting can lead to tax demand notices, where the tax department may require you to pay the due tax. To ensure accuracy:

Obtain a capital gains statement from your broker or the mutual fund company.
Record the correct details in your tax form.
Verify the LTCG calculations against your account statements.
Consider seeking assistance from a tax advisor for complex calculations.

Actions to Take Upon Receiving an Income Tax Notice

If you find yourself in receipt of an income tax notice for any of the aforementioned reasons, consider the following steps:

Understand the Notice: Begin by carefully reading the notice to comprehend the specific reason it was issued. This will guide your response and the documentation you may need to gather.
Identify Discrepancies: Determine whether the notice was triggered by a significant discrepancy in your income tax return. This could involve unreported income, incorrect deductions, or mismatches with information available to the tax authorities.
Verify Notice Details: Ensure the notice is legitimately addressed by checking the accuracy of critical details such as your full name, PAN (Permanent Account Number), mobile number, and email address. This verification is crucial to confirm the notice's validity and applicability to you.
Timely Response: Responding to the notice within the stipulated timeframe is imperative to avoid potential penalties or legal complications. Delayed responses can escalate the issue and may lead to further scrutiny or punitive measures.

By following these steps diligently, you can address the concerns raised in the income tax notice efficiently and minimize any adverse consequences. Also read, What to Do When You Receive an Income Tax Notice?

Conclusion

Getting an income tax notice might seem worrying, but it's often just part of how the tax system works. We've looked at common reasons these notices are sent out, like mistakes in your tax return or filing late. The key to handling a tax notice calmly is to keep good records, be honest in your tax filings, and act quickly if you get a notice. This way, dealing with the Income Tax Department becomes simpler and less stressful. Remember, getting a notice doesn't always mean you've done something wrong; it's just a step in the tax process. If you've received an income tax notice, IndiaFilings experts are ready to help you file a response. [shortcode_98]