Top Reasons Why You Can Get An Income Tax Notice: What You Need to Know

There’s a chance you may receive a written message from the Income Tax Department informing you of some discrepancy in your tax account. This is an Income Tax Notice. Although it seems daunting and haunting, there is not much reason to worry if one receives such a notice. There can be many reasons for being issued an Income Tax Notice, but fully grasping the error and then taking swift steps will be your best course of action. So let’s dive headfirst into our list of reasons why you can get an income tax notice.

1. Errors in Income Tax Return

A common reason for receiving an income tax notice is an incongruence between the income declared in your Income Tax Return (ITR) and the information available to the tax authorities. This usually occurs when you have underreported or unreported certain income sources.

Make sure you accurately report detailed information about any and all sources of income, complementing them with supporting documents, such as salary slips, bank statements, rent agreements, and property documents.

2. Unreported High-Value Transactions

The Income Tax Department keeps close notice to any high-value transactions you may be a part of. You may incur an income tax notice if you fail to report such transactions. Some common examples of high-value transactions that can trigger a notice include -

• If one or more current accounts receive cash deposits of Rs. 1 Cr. or more in an FY.
• If you receive cash deposits of 10 Lac or more in a year in your savings account.
• If you withdraw Rs. 1 Cr or more in an FY from one or more current accounts.
• If a payment received in cash exceeds Rs. 2 Lac for the sale of goods and services.
• If you make a payment for your credit card that is Rs. 10 Lac or more in any other mode than cash.
• If you engage in a transaction in immovable property of Rs. 30 Lac or more.

3. Non-Filing of Income Tax Return

Not filing your Income Tax Return (ITR) on time should be a huge no-no for anyone whose income falls in the tax bracket. You will receive an income tax notice in such a scenario. This notice may contain a reminder for you to file your returns and not complying with this notice may result in penalties or legal sanctions.

There are numerous benefits to filing your ITR before the due date. If you have missed the deadline, you can file an updated return within a specific timeframe.

4. Non-Payment of Tax on Interest Income 

Interest income is taxable, and you must report it accurately in your Income Tax Return (ITR). The Income Tax Department has mechanisms in place to track interest income, especially if it is credited to your bank account or reinvested in assets. You may be issued a notice if they find that you have not paid the appropriate tax on your interest income.

5. TDS Discrepancies

A common reason for receiving an income tax notice is having a discrepancy between the Tax Deducted at Source (TDS) information reported by your employer and the income declared in your Income Tax Return (ITR). Multiple reasons like incorrect TDS deductions, inaccurate reporting by the payer, or ITR filing errors can be the root of this issue.

You can avoid such mismatches by reviewing the TDS details provided in Form 16 or Form 26AS. Next, reconcile them with the income declared in your ITR, and take steps to correct any discrepancies.

6. False Claims

Claiming bogus deductions or making false claims in your Income Tax Return (ITR) can lead to dire consequences. The Income Tax Department regularly scrutinizes tax returns to push down on cases of tax scams. You may face penalties or legal action if you are guilty of such malpractices.

Some common examples of bogus deductions and claims include:

• Using fake rent receipts to claim higher House Rent Allowance (HRA) exemption.
• Claiming deductions under Chapter VI-A without proper documentary evidence.
• Claiming deductions for expenses that are not eligible for tax benefits.

7. Scrutiny Under the Income Tax Department

The Income Tax Department may randomly select taxpayers to be assessed to ensure their compliance with the tax laws. If selected for random scrutiny, you will receive a notice from the tax authorities requesting additional information or documentation. It is important to respond to the notice promptly and provide the information that has been asked for. Being under random scrutiny can be unnerving. But you should know it does not point towards wrongdoing. It is just a routine check by the government to ensure you’re complying with the tax laws.
 

Things To Do After Receiving an Income Tax Notice

Receiving an income tax notice can be a shock for some, but it's important to remain calm and take appropriate steps. Take a deep breath and read our list of things you should consider doing:

1. Study the notice carefully: Read through the notice to understand why it has been sent. Also, prepare any documents the tax authorities are requesting.
2. Note the deadline: Mark the deadline by which you need to respond or take action. Missing deadlines may land you in legal trouble or penalties.
3. Collect necessary documents: Any relevant documentation such as income statements, deductions, receipts, and any other financial records should be gathered to respond to the notice.
4. Ask for help: Talking to a tax expert like those on JJ FinTax may help you understand the notice and suggest the next steps you should take. You may also let them represent you in the official communication with the Income Tax Department.
5. Provide a quick response: If you are required to respond to the income tax notice,  waste no time to do so. 
6. Save Copies: Copy all documents you submit in response to the notice for your record. You can keep track of your communications with the tax authorities this way.
7. Assess your Tax Return: This notice can serve as an excuse for you to review your tax returns and make note of any discrepancies. File an amended return in case of any errors.
8. Being organized is Key: All communication related to the notice should be saved for your future reference. The original notice, all your responses, the documents you submit, and any other communications with the authorities should be kept in case you need them in the future.
9. Follow up if required: Follow up with the tax authorities if you have questions or require closure about the notice. 

Wrapping up…

Being aware of the reasons for receiving an income tax notice will help you know what to expect when you receive one. An income tax notice is nothing to be anxious about. Remain calm and take the necessary steps to fulfill your legal obligations. Seeking professional help may help you expedite this whole process. Consider getting in touch with us at JJ FinTax. Our tax experts and legal team are there at your disposal for dealing with income tax notices. We are there to clear any queries you may have and guarantee swift solutions for any legal or tax-related problems. Give us a call today!