All persons, firms and every kind of organisation are liable to submit their income tax returns for the income of the income year, expenditure of the income year, liabilities and deductions to the government. It is a formal declaration by the taxpayers that should keep on making them fulfil their duty to the nation. The segment earning more than a certain threshold must file income tax returns not only because it is a statutory requirement but also because it forms a vital part of financial responsibility. The government needs ITRs for measuring and collecting revenue to fund public services, infrastructure projects and social programs. Moreover, filing tax returns correctly and on time allows the taxpayer to be able to reclaim excess taxes paid, carry over losses and access many other fiscal advantages including loans and visas. It promotes accountability but reduces tax evasion. Filing has become much more mechanised and accessible, so through the development of technology, compliance has risen. In most parts of the world, failure and misrepresentation have penalties and criminal consequences, hence underlining the importance of such responsibility. In short, income tax returns are vital to the economic stability of a nation and enable the support functions of governments to ensure an uninterrupted revenue stream.
What is a Wrong Income Tax Return?
Misrepresentation of facts in the income tax return is misreported income taxes, which is an act of false income taxes. The wrongness may line up with chartered fraudulent acts or innocent mistakes present at the phase of income reporting, deduction claiming or tax liability computation. Submission of an incorrect income tax return may involve a penalty with interest or even, as sometimes is the case, imprisonment, depending on the nature and severity of the defect.
For accounts, preventive measures are taking place, and it is better to check all their financial data again and maybe from 26AS and AIS, select the correct ITR form and get a tax professional who is keen on the incident.
So, what makes an income tax return wrong or invalid:
- Misreporting of Income: When any income is not reported, other income that may be included by taxpayers may include interest from savings accounts, rent, freelance income and capital gains, Salary or bonus figures misreported in the taxable income section as business income or when any income from abroad does not get mentioned, it becomes problematic because certain areas follow the principle of global taxation.
- Wrong ITR Form Filing: There are forms to file the income tax returns of taxpayers for different sources of income. But in case a taxpayer files the wrong ITR forms (for example, takes ITR-1 instead of ITR-3 to file income from business) the taxpayer will fail to file it properly.
- Errors in claimed deductions and exemptions: When amounts of deductions are overclaimed under sections 80C, 80D or HRA or amounts are invalid, like a deduction claimed for an investment that is not permitted or for a dependent that does not exist.
- Wrong computation of tax: There may be an incorrect calculation of the taxable income, tax dues or rebate claims that result in the underpayment or overpayment of taxes. A surcharge, a cess or an incorrect tax slab may have been overlooked.
- Mistakes in personal details: Mistakes in personal information like name, PAN, Aadhaar number or bank account can result in invalidation of tax return or delay the process of refund.
- Loss of previous years not carried forward: In case the business or capital losses incurred in previous years do not get carried forward, then it results in an undue increase in tax burden along with knocking off potential savings.
- Form 26AS vs. AIS discrepancies: Basically, differences would occur because the income shown would not align with that reflected in Form 26AS (Tax Credit Statement) or AIS (Annual Information Statement). Such differences occur due to an incorrect reconciliation of TDS.
- Advance tax or self-assessment tax not paid: Income received from sources other than TDS, which comprises freelance and consultancy jobs, remains unaccounted for by many self-assessment taxpayers who ignore advance tax.
- Undisclosed Investments and Assets: High net worth investors (HNI) will rarely declare any offshore or foreign assets, whether in the form of real estate, which the respective jurisdictions call for declaration.
- Technical and Clerical Errors: Any filing errors in electronic format would be deficient, such as typographical errors, data entered wrongly or resulting from software faults, which could lead to inaccuracies in the tax return.
The taxpayer should, therefore, be very careful when scrutinising his financials so as to avoid the wrong submission of an ITR. This means all sources of income, as well as deductions and tax liabilities, must be carefully recorded on the tax return form. More than that, there should be a simple verification procedure or process of this information against actual documents for instance, Form 26AS, the Annual Information Statement (AIS), to ensure no tax credits and transactions are missed from the entire disclosure. Most importantly, there should be a choice of the ITR form based on the type of income. Filing with the wrong form can lead to wrong statements. However, you may choose to seek guidance from an expert, qualified tax practitioner who can help you avoid intricate tax matters without increasing the potential for mistakes. Inaccurate ITR filing attracts a host of punishments.
Underreporting and misreporting of income by taxpayers through negligence or intention can also incur charges, penalties and fines. Further, tax filing mistakes will lead to partial tax payment, which will attract interest on the late amount. Errors in the returns will suddenly delay or even reject the rightful claims for the taxes and then create undue financial pressure. In addition, people who are deliberately misrepresenting or avoiding taxes will be liable to face legal actions and cases. An incorrect tax return has a higher chance of being selected by the tax authorities for verification or audit, as well as further scrutiny or penalties.
Penalties For Filing Wrong ITR
The wrong Income Tax Return (ITR), whether filed due to negligence or willful misrepresentation, may invite penalties under the Income Tax Act 1961. The scale of the penalty actually depends on the nature and size of the wrong entry or fraud committed.
1. Penalty for Underreporting or Misreporting Income (Section 270A)
Section 270A aims to encourage honest tax declaration and penalizes income underreported or misreported. Where income is found to be underreported due to a bona fide mistake or omission, a penalty is levied at 50% of the amount of tax so determined. In case the additional tax payable because of underreported income works out to be ₹20,000, then the penalty would be ₹10,000. If the income is subsequently known to have been underreported due to any nearer underreporting or misreporting, then such misreporting leads to the penalty amount calculated at 200% of tax due or owed. The misreporting could be in the form of false expense claims, counterfeit invoices, and concealment of sources of income. If tax owed is ₹20,000, misreported income penalty would be ₹40,000, as mentioned.
2. Penalty for failure to comply with Notices (Sections 142(1), 143(2), 148, 153A, and 153C)
Loss of compliance with the income tax notice would include furnishing necessary information and appearing at scheduled hearings; the delayed performance would attract a penalty of 10,000 each time for an instance of nonperformance.
3. Late Filing Penalty on ITR (Section 234F)
Penalty will hence be applicable to the submission of the ITR if done after the expiry of the due date but without amendment in the ITR. In such a case, there will be a levy of ₹5,000 in case the returns are filed after the due date but before 31st December of the year relevant to the assessment. It, however, would go up to ₹10,000 if the returns are filed after December 31. However, in cases wherein the income is less than ₹5 lakh, an upper limit to the penalty is laid at ₹1,000.
4. Penalty for giving wrong information (Section 271J)
Any incorrect report or certificate submitted by a chartered accountant, merchant banker or registered valuer in the course of tax filing will incur a penalty of ₹10,000 for every such report submitted.
5. Penalty for furnishing a return other than the revised return [Section 139(5)]
Such taxpayers shall furnish a revised return at any time during the course of the assessment year and before the end of the time prescribed for the completion of the assessment except for the topmost period allowed before the expiry of the time. A taxpayer failing to correct the error in his document, such as ITR, within the prescribed period shall become liable to penalties for both misreporting, i.e., wrong reporting and underreporting.
6. Interest on defaulted tax payment (Sections 234A, 234B and 234C)
Section 234A provides that 1% interest per month would be charged on the outstanding tax at the time of the filing of the ITR after the due date. According to Section 234B, interest will be levied at 1% per month without any justification of reasons for the non-remittance of at least 90% of the advance tax payable in respect of the year. Section 234C also imposes interest for the failure to pay any advance tax instalments as and when they become due.
7. Prosecution for willful tax evasion (Sections 276C and 277)
In severe cases of tax evasion or intentional misdeclaration, proceedings can be initiated: penalties will include a prison term for a period ranging between three months and two years, besides a cash fine, where the amount of evasion is over ₹25 lakh. A prison term for tax evasion may vary from 6 months to 7 years if the evaded amount surpasses ₹25 lakh.
8. Penalty for income concealment [Section 271(1)(c)] (Applicable for Previous Years)
Section 271(1)(c) was the law that addressed income concealment prior to the advent of Section 270A. The penalties were from 100% to 300% of the tax amount connected with the concealment.
Conclusion
Submitting an erroneous income tax return can attract significant monetary penalties, legal consequences and higher audits by the respective tax authority of the country. Taxpayers are thus recommended to furnish the correct information, make use of the right income tax return form for filing, and also adhere to all tax laws. Corrective measures in time, in the form of filing amended returns and consulting tax advisors, will ensure compliance and protection against penalties.