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"Why You Get Income Tax Notices: Common Reasons and Remedies"

Income tax notices can leave taxpayers in a state of panic. When receiving such a suggestion, it is important to remember that it is not always a bad thing. Notices are usually issued by the Income Tax Department (ITD) for a number of reasons and some can be resolved relatively easily. In this article, we will explore the common reasons why you may receive an Income Tax Notice in India and how to avoid or deal with them.

1. Non-Filing or Late Filing of ITR

The most common reason for receiving income tax notices in India is non-filing or late filing of ITR. As per the Income Tax Act, every person having taxable income must file their ITR within the due date, failing which they may receive a notice from the Income Tax Department. Additionally, if you have not filed your ITR for a particular year, the Income Tax Department may issue a notice even after several years.

Solution

The best way to avoid getting a notice for non-filing or late filing of an ITR is to file your ITR on time. If you miss the deadline, file your ITR as soon as possible to avoid any penalty or legal consequences.

2. Discrepancies in income and TDS details

Another common reason for receiving income tax notices in India is a discrepancy between income and TDS details. If the Income Tax authorities find any discrepancy between the income declared in the ITR and the income reflected in other documents like Form 26AS or Form 16, they can issue a notice to the taxpayer. Similarly, if the TDS claimed by the taxpayer does not match the TDS details mentioned in Form 26AS, the taxpayer may receive a notice.

Solution

Ensure that all income and TDS details are recorded correctly in your ITR and match the details mentioned in Form 26AS and Form 16/16A to avoid getting notice of discrepancy between income and TDS details. If any discrepancy is found, file a revised return or respond to the notice promptly.

3. Non-disclosure of income or investments

Non-disclosure of income or investments is another reason why taxpayers in India receive income tax notices. If the Income Tax authorities suspect that the taxpayer has not disclosed all his income or investments, they can issue a notice to the taxpayer. Non-disclosure of income or investment can lead to prosecution under the Income Tax Act.

Solution

To avoid getting a notice for non-disclosure of income or investment, ensure that all income and investments are properly reported in your ITR. If you missed reporting any income or investments, file an amended return or respond to the notice immediately.

4. Adjustment of tax payable or refund

Taxpayers or refund adjustments are also common reasons for income tax notices received by taxpayers in India. If the taxpayer has any outstanding tax or penalty, the Income Tax Department can issue a notice to recover the arrears. Similarly, if the taxpayer has claimed a refund, the Income Tax Department can adjust the refund on any outstanding amount and issue a notice to the taxpayer.

Solution

To avoid receiving notices for tax arrears or refund adjustments, ensure that all taxes and penalties are paid on time. Also, if you have claimed a refund, make sure there is no outstanding balance before claiming the refund.

5. High value transactions

When you engage in high-value transactions, ITD may issue a notice to ensure that you pay the correct tax on these transactions. High-value transactions include buying or selling property, investing in stocks, mutual funds, etc. Taxpayers must report these transactions in their Income Tax Returns (ITR) and pay any applicable tax thereon. If ITD finds any discrepancy or non-reporting in these transactions, it may issue a notice.

Solution

To remedy this situation, taxpayers need to ensure that all their high-value transactions are accurately reported in their ITRs. In addition, taxpayers should keep all relevant documents, such as property purchase or sale agreements, stock trading statements, etc. If they need to provide evidence to ITD. Reporting of these transactions must be transparent and accurate, as the ITD has access to all relevant information and can quickly spot any discrepancies.

6. Foreign Assets and Investments

In recent years, the Indian government has become increasingly vigilant in ensuring that its citizens pay taxes on foreign assets and income. If you have foreign assets or income, it must be disclosed in your Income Tax Return (ITR) and the appropriate tax paid on it. Failure to do so may result in notice from ITD. For example, if you have a bank account abroad, even if you have not earned any interest on the account, you must disclose it in your ITR. Similarly, if you have assets or investments abroad, you must disclose them and pay tax on any income from them.

Solution

To resolve this situation, you should consult with a qualified tax professional who specializes in international tax laws. They can help you navigate complex tax laws and ensure you comply with all necessary regulations. Additionally, they can help you file any required forms and schedules in ITR, such as the Foreign Assets and Income Reporting (FAIR) schedule. It is also essential to keep accurate records of all your foreign assets and income, including bank statements, investment documents and property deeds. This document can be used to support your tax returns and ensure you are paying the correct tax on your foreign assets and income.

7. Not disclosing investments in your spouse's name

This is a common mistake made by taxpayers while filing income tax returns. However, this may attract a notice from the Income Tax Department, as the income from such investment is taxable in your hands. For example. Suppose you invest a substantial amount in a fixed deposit in the name of your spouse and do not declare the interest earned on this deposit while filing your income tax return. In this case, the Income Tax Department may issue you a notice not to declare this income.

Solution

To avoid such notices, it is important to declare all investments made in your spouse's name and pay appropriate taxes on the income. If you have made such investments earlier, you can rectify the situation by filing an amended income tax return and declaring the income from these investments. This will help you avoid any fines or legal action in the future.

8. Rejection or Defect in ITR

Rejection or defect in income tax returns refers to situations where the ITD finds an error or discrepancy in the tax return filed by the taxpayer. In such cases, the ITD may issue a notice to the taxpayer and ask them to correct the error and provide additional information to support their tax returns. There can be many reasons for disapproval or defects in ITR, such as failure to declare income from a particular source, the mismatch between claimed TDS and Form 26AS, non-reporting of foreign income, wrongly claiming deductions, etc. For example, if a taxpayer claims a deduction for a particular investment but fails to provide the required proof or supporting documents, the ITD may disallow the deduction and issue a notice to the taxpayer.

Solution

To avoid receiving income tax notices, it is important to ensure that all required declarations and disclosures are made while filing your income tax return. You should also check the income tax portal regularly to avoid penalties for late or non-submission of answers to the authorities. Additionally, certain forms are required to be submitted along with the income tax return in certain cases, such as Form 67 for foreign income, Form 10E for arrears and profit and loss and balance sheet if the net profit from the business/business exceeds 1.2 lakhs. An income tax return is considered defective. By being aware of and following these requirements, you can avoid getting notices and ensure a smooth income tax return filing process.

Conclusion

Receiving income tax notices can be a source of worry for any taxpayer. However, by knowing the common reasons why you might receive an income tax notice and taking the necessary steps to avoid such situations, you can ensure your tax compliance is in order. It is important to file your returns on time, report all your income and investments accurately and respond promptly to any notice or communication from the Income Tax Department. By following these basic rules, you can avoid the stress and hassle of dealing with Income Tax notices and ensure a smooth and hassle-free tax filing experience.

Regards

Santosh Patil

Tax Practitioner || Tax Advisor || Business and Start-up Consultant || Simplifying Finance for Everyone

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