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.

What Should I Do if I Get an Income Tax Notice?

Maintain your calm and double-check the information. Recognise the reason for the notice’s issue and take the relevant measures. Please keep in mind that you should never disregard an IT notification. If you are unsure about resolving the situation on your own, seek the assistance of a certified accountant or a tax specialist.

Additionally, keep the following considerations in mind to prevent legal ramifications:

  • Respond to the notification as soon as possible with all essential information and papers. If the whole set of documents is unavailable, you may seek more time but deliver what is currently accessible.

  • If there is a delay in submitting the papers, contact the IT department. This will keep them informed and demonstrate that you plan to comply with the evaluating officer’s standards.

  • The department does not always provide the document list for random review. In this instance, you must gather and submit any documentation that will support your response.

  • When you have completed all the papers and information, create a cover letter outlining your answer. Try to answer all of the questions in this letter, and provide a detailed list of the documents you are delivering with your response.

  • Make a copy of the materials you’re submitting. This is for your records if you ask for another enquiry after you submit your original answer.

  • When sending a response, you must attempt to get an acknowledgement from the department saying that the information has been received. If there is a subsequent disagreement, this will serve as evidence.

Essential Things to Keep in Mind

Respond on time

Always respond to the income tax department on time, even if you cannot gather the necessary information. You may also seek more time to prepare the same. It would imply that you are truthful and willing to cooperate with the authorities.

Keep the envelope

If you get a notification from the tax department, save it. The envelope carries a speed post number, which may serve as proof of delivery to you and when it was delivered.

Get expert Help

To fix the problem, you may seek the services of a professional. If the sensitivity of the notice is high, it is recommended that you have a Chartered Accountant represent you.

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