Income Tax Notice to Salaried Employees AY 2023-24

What is an Income Tax Notice?

An income tax notice is an official communication issued by the tax authorities to an individual or entity regarding their income tax matters. These notices act as a means to communicate with the taxpayer regarding tax liability, discrepancies in ITR, audit requirements, etc. There can be various reasons for receiving an income tax notice, like unreported income, wrongly claimed refund or deduction, mismatched information, etc.

The notice informs the recipient of the specific issue or concern that has come to the attention of the tax authorities and may require the recipient to provide additional information, rectify errors, or address any inconsistencies in their tax filing. It is important to make sure that you respond to such notice accurately and within the specified time frame to ensure compliance with tax regulations and avoid penalties.

Reasons for Income Tax Notices to Salaried Employees

A salaried individual might receive an income tax notice for various reasons, including:

• Discrepancies in Income: If there are discrepancies between the income reported by you and the income reported by your employer, financial institutions, or other sources, the tax authorities might issue a notice to seek clarification.
• Unreported Income: Failure to report all sources of income, such as rental income, interest income, or freelance earnings, could lead to notice for underreporting of income. For example, income from other sources like social media or moonlighting income.
• Incorrect Deductions: If you claim deductions or exemptions that are not supported by proper documentation or do not meet the eligibility criteria, you might receive a notice. You might also receive a notice if the income tax department discovers any fake deductions claimed. For example, many salaried employees use fake rent receipts to claim HRA exemption. Such individuals are under the IT department’s radar and receiving HRA income tax notices.
• High-Value Transactions: Unusual high-value transactions, like large cash deposits, property purchases, or investments, could trigger a notice as tax authorities aim to ensure the legitimacy of these transactions.
• Mismatch with Form 26AS: Form 26AS is a consolidated statement of all tax-related transactions associated with your PAN. If there's a mismatch between the income reported in your return and the data in Form 26AS, you might receive a notice.
• Non-Filing or Late Filing of Returns: Failing to file your income tax return or filing it after the due date might lead to a notice demanding an explanation for the delay.
• Random Scrutiny: Some returns are selected randomly for detailed scrutiny to ensure compliance and accuracy.
• Foreign Income and Assets: If you have foreign income, assets, or financial interests and you haven't disclosed them as required by tax regulations, you might receive a notice.
• Non-Disclosure of Gifts or Loans: Not reporting gifts or loans received, especially if they exceed a certain threshold, might attract the attention of tax authorities.
• Failure to Respond to Previous Notices: Ignoring or not responding adequately to previous notices can lead to further and more serious notices.

Have you also received a tax notice on any of the following reason? Don’t panic, our tax experts are here to help you respond to these notice within timeline and accurately.

What are the Types of Income Tax Notices to Salaried Employees?

• Intimation u/s 143(1) - This notice is issued after the ITR has been filed and processed. It acts as a means to communicate the tax computed by the income tax department to the taxpayer. This notice might be issued if there is any pending tax liability or if there is a refund that is to be paid.
• Notice u/s 142(1) - Notice u/s 142(1) is issued in two cases -
  When you have already filed the return, the income tax officer needs more information and documents.
  If you have not filed your ITR, but the income tax officer wants you to file it.
  If you fail to respond to the notice, it might attract a penalty of upto Rs.10,000 and imprisonment of up to 1 year.
• Notice u/s 148 - If the income tax officer has proof or reason to believe that you have not disclosed your income correctly or paid your taxes, then you might receive the income escaping notice u/s 148.
• Notice u/s 139(9) - If there are errors or discrepancies in the tax return filed by the taxpayer, the tax department might issue this notice to give the taxpayer an opportunity to rectify those errors. It is also known as a defective return notice. If you receive this notice, you have to file a revised return addressing the issues mentioned in the notice within 15 days of receiving it.
• Notice u/s 143(2) - This notice is issued to notify the taxpayer that his/her return has been picked for scrutiny or a detailed assessment. The purpose of such scrutiny is to ensure that you have not understated your income, paid lesser taxes, or claimed excessive losses.
• Notice u/s 156 (Demand Notice) - If any amount like tax liability, fees, penalty, or fine is due to be paid by the taxpayer to the income tax department, then he/she might receive notice u/s 156. The taxpayers are required to pay the required amount within 30 days of receiving the notice.
• Notice u/s 245 - If the income tax department believes that the tax has not been paid for the previous years and wants to set off that demand with the current year’s refund, then he/she might issue a notice u/s 245. You have to respond to this notice within 30 days of receiving it. If you fail to respond within the specified time frame, then the income tax officer can consider this as consent and make the adjustment.

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How to Respond to Income Tax Notices for Salaried Employees?

Responding to income tax notices effectively requires careful attention and adherence to the procedures outlined by the tax authorities. Here's how to respond to income tax notices:

• Read the Notice Thoroughly: Carefully read the notice to understand the reason for its issuance, the specific issues raised, and the required actions.
• Gather Documents: Collect all relevant documents, including your income tax return, Form 16, Form 26AS, investment proofs, bank statements, and any other documentation related to the issues raised in the notice.
• Timely Response: Note the deadline for responding mentioned in the notice. Ensure you respond within the stipulated time frame to avoid complications.
• Provide Supporting Documents: Attach all the relevant supporting documents that validate the information you're providing in your response. Organize the documents logically to facilitate verification.
• Seek Professional Assistance: If you find the notice complex or challenging to respond to, consider consulting a tax advisor or a chartered accountant. They can provide guidance based on their expertise and experience. You can also book an eCA from Tax2win.
• Track the Response: If using online methods, keep track of the submission and any acknowledgment or response received.
• Regularly Check for Updates: Monitor your communication channels regularly for any updates or notices so that you can respond to them in a timely manner.

Why have Salaried Employees been Receiving Income Tax Notices for AY 2023-24?

Fake Deductions and Exemptions

Apart from the reasons mentioned above, salaried individuals are under Income Tax Department’s scanner for claiming false deductions and exemptions. Many salaried individuals are receiving HRA income Tax notices and other notices for claiming rent deductions using fake rent receipts.

The income tax act allows individuals to claim various deductions and exemptions under the old tax regime. For example, an individual is allowed to claim an exemption on House Rent Allowance (HRA), Leave travel allowance, and interest deduction.

However, many individuals claim these deductions by furnishing fake rent receipts and documents. The government is identifying such individuals using the application of powerful AI technology. The AI detectors detect the use of any fake documents and help identify salaried individuals claiming false deductions. The government is rapidly cracking down on such practices for the AY 2023-24.

So, if you are filing your return this year and claiming deductions like HRA and LTA, keep your payment proofs handy, as the income tax department can ask you to furnish them.

For example, if you are claiming an HRA deduction, you must have valid rent receipts to avoid getting an HRA income tax notice. Similarly, if you are claiming an LTA deduction, you must have travel tickets, invoices, and other relevant documents.

Not just HRA and LTA, but the AI scanner implemented by the income tax department is able to detect all fake documents. Therefore, the income tax department has become more vigilant and is sending notices to individuals who have used any type of fake documents for claiming deductions or exemptions under HRA, LTA, donations, etc.

Moonlighting and Unreported Income

The Income Tax Department is also cracking down on moonlighting income that goes unreported in the ITR. Moonlighting is the practice of earning income apart from your regular job or the primary source of income but not disclosing it in the income tax return. It is considered a misreporting of income and can lead you to receive notices.

In many cases, the income from moonlighting is higher than that of the primary source. Most of these earnings were received online. The AI technology implemented by the Income Tax Department was able to successfully identify such unreported income. The instances of moonlighting were more frequent in the years after 2019. Initially, only those individuals were sent notices whose annual undisclosed income was between Rs. 5 lakhs and Rs.10 lakhs. But now, the income tax department is identifying all such individuals and sending notices for misreporting of income.

Even though the income tax department is not sending notices to individuals for moonlighting as it is legal in India, it is sending notices to individuals for not reporting this income while filing ITR and evading taxes.

If you are also engaged in moonlighting and have not reported this income in the ITR, be prepared as you will have to provide a valid reason/explanation for the same, and you might also have to pay a penalty ranging from 50% to 200%.

What can you do to Prevent Penalties and Notices for Salaried Employees?

Here’s what you can do to prevent penalties and notices -

• File Accurately and Timely - File your tax return by the deadline. If you're unable to file on time, consider filing a belated return as soon as possible. This will help ensure that you do not attract unnecessary penalties and notices.
• Verify Form 26AS - Verify the information filed in the ITR with that mentioned in Form 26AS, as it is one of the primary reasons for receiving income tax notices.
• Maintain Financial Records - Keep organized records of all your financial transactions, including income, expenses, and any supporting documentation. This will help you substantiate your claims if you're ever audited.
• Consult a Tax Expert - Tax management can be intimidating, and if your tax situation is complicated, the best idea is to take professional help. Consult a chartered accountant to get accurate filing and avoid notices and penalties. You can also book an eCA from Tax2win to get a hassle-free ITR filing experience.
• Respond Quickly - If you receive any notices or communications from tax authorities, respond promptly and follow their instructions. Ignoring notices can lead to more severe penalties.
• Don’t forget to report any income - Make sure you report income from all the sources, and do not forget to report any significant income.
• Keep documentary proof of the deductions claimed - Keep the supporting documents and proofs of all the deductions and exemptions claimed by you. The Income Tax Department can ask you to furnish them to prove the validity of your claims.

Given the current scenario where the income tax department is rapidly cracking down on salaried individuals and sending them notices, it is extremely important to be vigilant and check your emails regularly for any updates from the tax authorities. Make sure you respond to such notices within the specified time frame, or you might have to pay hefty penalties. You can also book an eCA from Tax2win to help you experience seamless ITR filing. Book eCA Today!