Income Tax Department Leverages AI for Enhanced Compliance

The Income Tax Department has intensified its monitoring and compliance efforts by leveraging artificial intelligence (AI) to track online taxpayer behavior and identify inconsistencies in tax returns, as reported by Indian Express. According to the Chairman of the Central Board of Direct Taxes (CBDT), Ravi Agrawal, the department is analyzing online activity, financial transactions, and return-filing patterns to encourage taxpayers towards better compliance.

Insights from the AIS Portal

One of the key insights comes from how frequently users access the Annual Information Statement (AIS) online. On average, taxpayers visited the AIS portal 3.5 times, resulting in a total of 24 crore visits. However, only 9 crore tax returns were filed last year, despite the generation of 40 crore AIS documents from over 650 crore financial transactions. The frequent access to the AIS without filing returns may indicate a taxpayer’s intent or difficulties in fulfilling their filing obligations. This understanding allows the department to intervene by offering assistance or prompting action through email or SMS.

AI Flags High-Value Transactions and Errors

The department employs AI-powered data analytics to flag high-value transactions where returns have not been filed, as well as cases of repeated errors in returns. The system identifies incorrect claims of exemptions and deductions, leading to the nationwide verification drive launched on July 14, 2025, across 150 locations. This operation specifically targeted fraudulent deductions and successfully identified over 1.5 lakh PANs linked to these practices. The CBDT asserts that many of these cases stem from misguidance by intermediaries rather than the taxpayers themselves.

Data-Driven Nudges Towards Compliance

Adopting a strategy of “nudging” taxpayers towards voluntary compliance, the department reached out to 19,501 taxpayers based on foreign asset data received through the automatic exchange of information. Consequently, 62% of these taxpayers updated their returns, revealing foreign assets valued at Rs 29,208 crore and foreign income of Rs 1,089 crore. Furthermore, excess claims under Section 80GGC amounting to Rs 9,000 crore were identified, leading to a reduction of claims by Rs 963 crore and facilitating additional tax payments of Rs 409.5 crore.

As of June 18, 2025, around 89 lakh updated returns had been filed, generating Rs 9,577.06 crore in additional tax revenue.

The Importance of Accurate Contact Details

While digital engagement is essential to the department’s compliance model, a significant challenge persists: the provision of incorrect or temporary contact details by taxpayers. Many email addresses belong to agents or intermediaries, which hampers the department’s ability to communicate directly with taxpayers. Chairman Agrawal emphasized the need for taxpayers to provide accurate email and mobile contact information to enhance communication and improve the effectiveness of taxpayer nudges.

The CBDT clarifies that these initiatives are not punitive but aimed at creating awareness and encouraging correct filing. With AI offering a comprehensive view of taxpayer transactions, the department seeks to increase return filings, close compliance gaps, and uphold the integrity of the tax system. As Agrawal aptly states, “We trust the taxpayer, but incorrect claims of exemptions and deductions are not acceptable.”