Tax Notice Over Mismatch In High-Value Expenses, Bank Withdrawals: Here's What Taxpayers Can Do

High-income taxpayers are increasingly facing scrutiny on their high-value transactions and bank withdrawals. Imagine waking up one morning to find an income tax notice in your mailbox, questioning how you have been funding your lifestyle. Even after diligently filing your taxes, chances are that you may end up with a notice from the tax department asking for a breakdown of your expenses.

Why is the Tax Department Watching?

Recently, the taxman has adopted a more sophisticated approach to identifying potential tax evasion. Traditionally, the I-T dept focused more on undisclosed income or unexplained expenditures. However now they have adopted a new tracking metric which includes cash expenditures that don’t correspond with bank withdrawals.

Says CA Ashish Niraj, Partner, A S N & Company, Chartered Accountants, “These days Income Tax Department is doing 360 Degree profiling to track possible tax evasion. Some Taxpayers do not report their cash earnings in their income tax filings and spend it to meet their day-to-day expenses, they report only Bank receipts as income.”

He adds, “To catch these types of evaders the Department is checking whether cash withdrawals by them is according to their standard of living or not, whether they are incurring Household or travel expenses through bank or by utilising unreported cash income.”

If the officials find there is a mismatch in your cash withdrawals and the reported income, they send notice to taxpayers requiring explanation.

What kind of spending patterns lead to such notices?

According to CA Niraj, “Purchasing property, jewellery, expensive paintings, spending big amounts for lavish weddings, etc., without corresponding income being offered as income in your Tax returns can lead to Tax officials sending notices.”

He notes that the I-T Department is now equipped with the latest data analysing tools to catch the tax evaders.

What Should Taxpayers Do?

It is important to note that simply receiving a tax notice doesn’t mean you are guilty of tax evasion. However, it does mean you need to respond carefully and promptly.

Here’s what you should do;

1) Don’t Panic, But Act Quickly: Ignoring a tax notice can result in hefty penalties. Says CA Niraj, “If you receive any notice the first step is to submit a detailed satisfactory reply along with supporting documents. You can take help from any tax expert to form this reply.”

2) Gather Documents: You should also prepare important documents such as bank statements, credit card bills, salary slips, property purchase records, or any other financial document that justifies your expenses. In case the transactions were made using any alternate bank account or through family support, you should also provide documentation to validate the same.

What happens if you don’t reply to the notice?

Failure to reply to the income tax notices leads to penalties and additions to taxable income. Your reply should be such that Tax Officials are satisfied that you have not underreported your income and that all your expenses are incurred through legal means.

Adds CA Niraj, “Even if you submit a reply but tax officials are not satisfied with your submission then you are liable to pay tax with interest and penalty ranging from 100 per cent to 300 per cent.”

What if you are found guilty? Says CA Niraj, “As per Section 276C of the Income Tax Act if you are found guilty of wilful evasion of tax then you can be punished with rigorous imprisonment of six months to 7 years along with fine. Due to strict taxation laws it's better to submit a proper reply to income tax notice along with proof to substantiate your claim.”

How To Avoid Such Notices?

• Maintain proper financial records of your major expenses and ensure that they are backed by proper documentation, receipts, and proof of transactions

• Even if you have income in cash, it is important to declare it properly while you are filing your income tax returns

• Take help from an expert if needed to avoid rounding off numbers or misreporting income and expenses

Since tax authorities are using advanced data analytics to track financial discrepancies, maintaining transparency in financial dealings is more important than ever. By ensuring that your bank transactions and declared income align with your spending habits, you can avoid unwanted tax scrutiny and keep your finances in check.

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