Notice from Income Tax Department – Reasons and How to avoid it?

Notice from Income Tax Department – Reasons and How to avoid it?

Once income tax returns are filed and e-verified, one would think their job is over. There are several instances where the Income Tax Department would send notice to you about your income tax return. They might ask for explanation and further scrutiny. Many of us might not be aware why the income tax department sends notices even though you file income tax returns on time and accurately. In this article, we would provide Various Reasons you would get notice from the Income Tax Department and tips and suggestions on how you can avoid them.

What is an Income Tax Return (ITR)?

Skip this section if you are already aware of ITR

Income Tax Return is a statement which furnishes information about income and tax thereon to be provided by a taxpayer to the Income Tax Department. Different forms are available like ITR1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, and ITR 7 for different taxpayers having different types of income and from different sources. One has to choose right ITR form before they file income tax returns. There may be many types of discrepancies found in the ITR filed by you like concealment of taxable income, claiming an in genuine refund, non-filing of ITR, etc. The Income Tax Department issues notices under section 139 (9), 143 (1), 143 (2), 143 (3), 245, 144, 147, and 148 of the Income Tax Act, 1961 seeking the satisfactory answers in this regard.        

Notice from Income Tax Department – Reasons and How to avoid it?

Here are the majority of the reasons why you might get notice from IT Department. We have provided income tax notice list, some tips and suggestions. There could be several other suggestions too, and these tips may not be comprehensive. Also the income tax notice format would depend on the reason.

#1 – If you delay in filing ITR, you may expect notice from tax dept

If you forget to file your ITR within the deadline, you would get income tax notice for not filing returns.

How to avoid – File your income tax return before the deadline for a particular assessment year. The deadline every year is 31st July pertaining to previous financial year tax returns.

#2 – Mismatch between TDS Claimed Vs Form 26AS

Ideally, the TDS you are claiming has to match with the Form 26AS and Form 16 or Form 16A. But, at times, it may not match. The reason for getting this notice is the mismatch in the TDS deducted and appearing in form 26AS and the TDS claimed in the return of income by the assessee.

How to avoid – Always check the TDS reported in the Form 26AS before filing the IT return and also ensure that the TDS is deducted at the correct rate by various deductors. In case of any mismatch, approach the respective deductor to update their reporting before filing the tax returns. Once the tax returns are filed, there is no way you can reconcile for the tax deducted by your employer or banks for FDs.

#3 – Have you not disclosed some income – You may expect notice

The Revenue Department obtains the information of income from many sources like banks, employers, tenants, mutual exchange of information between countries, etc. If you forget to disclose any income in your ITR, it may lead to mismatch with the data of Revenue Authorities resulting in the issuance of notice in your name. 

How to avoid – You must gather all your financial statements at one place and list out the income sources meticulously from which you receive income. If you have multiple sources of income with huge volume, hiring a CA / Tax expert could be a good idea. It is always better to know income tax investment proofs checklist and guidelines

#4 – Not reporting long-term capital gain (LTCG) from equity

At the time of filing IT, you have to report any realized LTCG on listed equity and equity-related mutual funds. LTCG above 1 lakh in a year on listed equity shares and equity-related mutual funds on which STT has been paid will be taxed at 10%. Many of you might not be paying attention about LTCG as this could be a small amount, but there could be huge transactions.

How to avoid – Before filing your income tax return, make sure that you get the LTCG statement directly from the broker or mutual fund house. You also need to ensure that you have made the right calculations and have mentioned the information accurately.

#5 – For flaws in the tax return

There can be some flaws in the income tax return like choosing wrong ITR form. In such a case, you get a defective return notice u/s 139 (9) of the IT Act. You need to respond within 15 days from the day of receiving the notice. In such a case, you need to file a revised ITR. It is always advisable to fill the revised return before the deadline.

How to avoid – Double-check the IT form to be filed based on the incomes you are reporting. There is no other way you can avoid.

#6 – For not declaring the investments made in the name of the spouse

If some investment is made in the name of the spouse through the income of the taxpayer, then the income arising out of such asset needs to be clubbed in the hands of the taxpayer. If you forget to disclose this income in your ITR, you may receive a notice u/s 143 (2).     

How to avoid – If your spouse is not working, any amount you transfer to them or any amount you invest in your spouse name ideally treated as your investment. In such case any returns / income arising from the investment done by you on your spouse name, has to be clubbed with your income and pay income tax.

#7 – If your income tax return (ITR) is selected for scrutiny

The taxman randomly select the returns for scrutiny to enforce tax compliance. It can be related to mismatching and inaccurate reporting of income or based on some predefined criteria issued by the income tax department every year. They might also include income tax scrutiny list in the notice.

How to avoid – Report all your taxable income carefully on the ITR. Keep the entire relevant documents in place so that at the time of scrutiny, they can be presented before the assessing officer. You may need to keep this for few years after you file ITR.

#8 – High Value Transactions – Expect a notice from tax dept

The income tax department keeps an eye on all the high-value transactions. The department may send you a notice (within 6 months from the end of the financial year in which the return was filed) if you have been a part of any high-value transaction and not filed your return on time or may ask you about the source of the income. In such a case, you are required to submit a reply stating valid reasons within 21 days.

How to avoid – First, you need to report such transactions in your ITR and this can avoid any notice from the tax department. If you have missed to report high value transactions, the taxpayer should give a satisfactory reply to the department mentioning the source of the income or any queries demanded.

#9 – For setting off refunds against remaining tax payable

You might be getting a tax refund in the current assessment year but if you have previous tax dues, the assessing officer may issue you a notice asking you for the pending demands from the previous years to be adjusted with the refund amount.    

How to avoid – Ensure that all your previous financial year tax returns are cleared before you claim any income tax refund.

#10 – Evaded tax in previous years – You may get notice from IT Dept

The IT Dept has the right to re-assess the returns of previous financial years filed by you, if the tax officer has reason to believe that the taxpayer had income in the previous years, which was chargeable to tax and has escaped assessment can issue a notice to you u/s 147 of the Income Tax Act.

How to avoid – You must file your income tax return with the highest loyalty and avoid the malpractice of tax evasion. 

Conclusion: If you are moving on the legal lines, you need not worry even if you receive any notice from the Income Tax Department.  Please make sure that you respond to the notice within the stipulated time-period, otherwise, you may attract huge penalties. The best way is to try to save tax legally instead of avoiding income tax.

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Suresh KP

Notice from Income Tax Department – Reasons and How to avoid it

Suresh KP

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