Reasons for Receiving A Tax Notice

Top 10 Reasons for Receiving A Tax Notice From Income Tax Dept.

Tax Planning

There are multiple reasons for why you as a registered taxpayer, might receive a tax notice from the income tax department like missing the due date of ITR filing, calculation errors, claiming excessive losses, etc.

The income tax department issues the tax notices to registered taxpayers under the Section 139(9), 143(1), 143(2), 143(3), 245, 144, 147 and 148 of Income Tax Act, 1961. These notices are concerned with claiming an invalid tax refund, concealment of actual taxable income, non-filing of ITR, long term capital gains, scrutiny, etc.

Here are Top 10 Reasons why you might get an income tax notice and how to avoid it:

1.Delay in ITR Filing

You as a registered taxpayer might receive a reminder notice for ITR filing from the tax department, in case, you have not filed your return by the deadline. This notice is generally sent before the end of the assessment year to taxpayers.

Filing tax returns is mandatory for individuals having taxable income, as per section 139(1) of income tax (IT) Act. The non-filing ITR related notices are usually automated reminders that point out one of the tax obligation mentioned under section 139(1) for taxpayers and is also generated to help taxpayers avoid any penalty or late payment charges. Although, notice under section 142(1)(i)  might also be issued to taxpayers if they fail to furnish their returns within the given due date.

As a taxpayer, if you fail to file your tax returns by the due date, you will have to pay a late filing fee. For instance, you might have to pay a penalty of INR 5000, if you miss the (Deadline) due date of Income tax return filing for the current financial year and file your belated returns before December 31, 2019. Although, this penality might increase up to INR 10,000 if your file your ITR on or after January 1, 2020.

How to Avoid Notice:

Hence, each taxpayer must file your ITR before the deadline for a given assessment year to avoid any late payment and interest fees.

2.Improper Reporting of Long Term Capital Gains (LTCG) from Equity

Reporting LTCG from listed equities or equity-related mutual funds is mandatory for taxpayers while filing ITR. LTCG above INR 1 lakh from equity or equity-based mutual funds attract on which securities transaction tax (STT) is paid to attract a tax of 10 per cent. Although, reporting LTCG in annual returns is a bit complex for the taxpayers from FY 2018-19 and onwards.

As per the tax reports, during the tax scrutiny, the review of high-value transactions by tax authorities might disclose unreported capital gains. Therefore, the taxpayers will include such capital gains in taxable income charge interest on tax shortfall, and initiate penalty under section 270A.

Hence, it is vital for taxpayers that they do right computation and mentioned all the information correctly. A simple calculation error in calculating taxable income might get you a demand notice, asking you to pay the tax due.

How to Avoid Notice:

Taxpayers must generate a statement on capital gains by taking help of either broker or directly from the mutual fund house, and mention it correctly in their return forms. Check the LTCG details yourself with account statement properly, and if calculations get complex, take help of tax experts.

3.TDS Mismatch with Form 26AS

TDS ideally needs to be same in Form 16 or 16A and Form 26AS while filing your ITR. Although there can be several reasons why your TDS details in ITR doesn’t match with the one mentioned in Form 26AS.

For TDS mismatch, you might get a notice from the tax department under section 143(1).

This generally happens when the information mentioned in TDS reported by deductee to revenue authorities and TDS claimed in return of income by assessee mismatches.

How to Avoid Notice:

As a precautionary measure, the taxpayer’s must check the TDS reported in the Form 26AS and mak sure that TDS is correctly reported by various deductors. After this, the taxpayers should proceed to file their income returns.  In the case of any mismatch in TDS, the assessee must contact the deductor to update their TDS reporting.

4.Obscuring Taxable Income

Revenue authorities obtain information about the income of assesses from different sources like banks, employers, tenants, mutual exchange of information between countries etc. If you have not shown some income in your ITR, then you may get a notice from the income tax department if they detect the non-reportage. Notice is issued under section 139(9) or 143(1) for non-disclosure of income.

Tax revenue authorities are allowed to gather income details of taxpayers from multiple sources like banks, tenants, mutual fund houses, and tenants, etc. Not showcasing your actual income in ITR is also a reason for receiving a tax notice from the tax department. Such notice is issued under the 139(9) or 143(1) for non-disclosure of income. Any information related to taxable income not disclosed by you allow tax man to send a notice concerning non-disclosure of income.

How to Avoid Notice:

As a registered taxpayer, one should collect all their financial statements together to figure their total income sources from where they receive income and then put such details in ITR.  When an assessee misses entering one of the income source data, it generally leads to mismatch with the data that is already available with tax authorities, which leads to the issuance of notice.

To avoid this, it is advisable for taxpayers to check Form 26AS along with overseas income details (in case of ordinarily resident) like overseas bank statements, payslips, etc. before filing their returns to ensure all incomes are well-reflected.

5.Improper Declaration for Investments

In many cases, you made investments in the name of your spouse and fails to mention that in your returns. In such cases, any income gains from such investments are eligible for tax deductions at your end; therefore, must be declared while you file returns.

As per the income tax law, if an asset is owned by the taxpayer in the name of the spouse through his/her own income, then any income received from such assets must be clubbed & taxed in the hands of the taxpayer.

A notice under Section 143(2) is generally issued by revenue authorities to taxpayers. In such detailed audit/scrutiny, the authorities can ask questions from the taxpayers about their return filed and income generated through investment in the name of a spouse. Such information can also be retrieved by tax authorities from sources like banks, registrar offices etc. The mismatch on such information or failure to declare the income by taxpayers is considered as tax evasion by the taxman, resulting in a heavy tax penalty.

How to Avoid Notice:

To avoid taxman notice due to the improper declaration of investments, the taxpayer should carefully calculate income accumulated by a spouse from assets that are acquired out of the income of the taxpayer.

6.Filing Incorrect Tax Return

Filing ITR incorrectly or in the wrong format can you a defective return notice from the taxman. This notice is issued under section 139(9) of the Income Tax Act. The taxpayers are obliged to respond to this notice within 15 days, starting from the date of notice received. Further, the taxpayers must also file a revised ITR before the due date of Income tax return filing.

How to Avoid Notice:

Check your income tax return form properly and make sure that you are filing a correct form for incomes you are reporting.

7.Excessive High-value Transactions

In case of too many high-value transactions, you might get a notice from the tax authorities. The tax authorities keep a keen eye on individuals who have made too many high-value transactions in a particular assessment year but have not to file any returns. For instance, if you have made too many payments through your credit card, brought a property or expensive car, and made huge investments in a single year, it is highly likely you will receive notice from taxman asking you give valid reasons or file your returns within a time period of 21 days.

Making significant investments or high-value transactions in a fiscal year, a notice under section 143(2) can also be issued within six months from the end of the financial year for which return was filed. This shows the taxpayer has been selected for tax scrutiny by tax authorities.

How to Avoid Notice:

In such of receiving notice for high-value transactions, you must send a satisfactory reply to the tax authorities; if they accept the reply, the case gets closed immediately. If vice versa happens and taxman sent you a scrutiny notice, you must readily provide all the information asked in the notice by revenue authorities.

8.Your Filed Returns Gets Picked for Scrutiny and Tax Compliance

Taxmen have the authority to randomly choose and scrutinise returns in order to enforce tax compliance. Hence, your returns might get picked by your assessing officer for tax scrutiny by issuing a notice to you u/s 143(2). The scrutiny might include inaccurate reporting, late return filing, data mismatch, or it can be based on the criteria defined by the tax department each year.

In case of receiving a scrutiny notice from the taxman, you must first check the validity of the notice and then send an appropriate response in the given specified time limit. A penalty of INR 10,000 might get imposed on you u/s section 272A of the Income Tax Act if you fail to respond within the given time limit. You can always consult a professional Chartered Accountant (CA) for framing a suitable reply and avoid any penalty.

How to Avoid Notice:

You must always keep proof of all your income and another income taxable with you and pay due taxes on time to stay tax-compliant. Always remember to keep documentary and other evidence as proof of whatever is claimed in your return, so that you can produce them instantly during scrutiny.

9.Settling off Refunds Against Remaining Tax Payable

In case you have claim refund on the tax paid, but some of your previous tax dues are still pending, the assessing officer (AO) might drop a tax notice to you.  The A.O has the authority to ask you to clear your previous tax dues or adjust them with the refund amount.

Such notice falls under section 245, which refers to setting off refunds against the tax dues. An outstanding demand or tax dues of previous tax years could be asked to adjust against the refund claimed by the taxpayers by the taxman.

How to Avoid Notice:

The simplest way to avoid notice related to settling off refunds with remaining tax payable is to clear all tax dues of previous assessment years. Taxpayers should log in to e-filing portal and check for any outstanding tax payments, and if there is a demand, they must provide a response to it within the given time limit (30 days generally).

10.Tax Shunning in Past Years

As per the income tax Act, the revenue authorities also have the power to check returns filed in previous years by taxpayers. Assessments officers can randomly pick returns filed in previous years by a taxpayer for reassessment on certain pre-defined criteria. Although, the notice is issued only when the assessing officer is sure that income earned in the past years by a taxpayer was subject to tax, but it somehow escaped the assessment.  A reliable evidence of high-value tax evasion leads to dispatching of this kind of notice to taxpayers.

New information regarding tax fraud, suppression of facts evaded taxes, etc. received by tax authorities from alternative sources also force them to issue such kind of notice to taxpayers.

How to Avoid Notice:

As a taxpayer, you must keep the utmost good faith while filing your ITR  and avoid evading tax.

Key Takeaways:

  1. First and foremost, the taxpayers must respond to any kind of notice issued to them by the tax department within the given time limit. In case of tax scrutiny, you as a taxpayer should always stay ready with the relevant documents on time to verify the necessary details.
  2. Based on tax logics built in the system, the tax notices are issued. Taxpayers have the power to avoid such notices by filing their tax returns within time, declaring exact income details in ITR as well as in sync with Form 26.
  3. Taxpayers should not exceed the INR 2 lakh limit of credit card payments, limit the cash withdrawal and deposits in a bank account during a financial year. Apart from this, all the reports,/purchase transactions of mutual funds/shares should be updated in ITR by taxpayers.
  4. A huge penalty might be charged as per income tax norms if you fail to respond to the notice. Therefore, taxpayers should always file Income tax return freetheir on time and pay all tax dues of previous years to avoid getting notices from tax authorities.


2 thoughts on “Top 10 Reasons for Receiving A Tax Notice From Income Tax Dept.

  1. It was definitely informative. Your website is very helpful.
    Thank you for sharing!

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