Income-tax notices are increasingly data-driven

Income-tax notices are increasingly data-driven

The Income-tax Department now leverages Annual Information Statement/Taxpayer Information Summary/Statement of Financial Transactions reports, foreign remittance data, and cross-border information exchange to identify inconsistencies often before returns are processed. Key risk areas to reassess before filing / revising your income-tax return

• Foreign stocks, dividends, or assets not disclosed in Schedule FA
• Incorrect / false claims u/s 80G / 80GGC
• Donations to unverified or non-compliant entities
• Non-filing of income-tax return despite high turnover or high-value transactions
• Income reported under incorrect heads
• Wrong income-tax return form selection
• Mismatch between Annual Information Statement, Taxpayer Information Summary & Form 26AS
• Significant transactions flagged in Annual Information Statement, Taxpayer Information Summary without explanation

Why this matters:

Automated risk engines flag even small inconsistencies, triggering notices under various provisions of the Income-tax Act, 1961. Action points

• Reconcile Annual Information Statement, Taxpayer Information Summary thoroughly before filing
• Disclose foreign income/assets accurately
• Claim deductions strictly as per law
• Respond to notices within timelines with proper documentation
• Proactive compliance today prevents litigation tomorrow.

Income-Tax Notices in India Are Now AI-Driven, Not Random

Income-tax enforcement in India has undergone a fundamental shift. Notices are no longer issued based on random scrutiny or manual selection. They are now the result of advanced data analytics, AI, and machine-learning models that proactively detect non-compliance.

Initiatives such as the NUDGE campaign and Project Insight demonstrate how the Department is moving towards predictive, preventive, and faceless tax administration. Following are Key Data-Driven Initiatives:

NUDGE Campaign (AY 2025-26) :

• The Income Tax Department launched the data-driven NUDGE (Non-intrusive Usage of Data to Guide and Enable) campaign, which uses risk analytics to identify Bogus or ineligible donations, Invalid or misused PANs, Incorrect deduction claims. Moreover, Taxpayers receive SMS and email nudges prompting voluntary correction.
• Impact so far Over 21 lakh taxpayers revised their income-tax return & More than ₹2,500 crore in additional tax paid voluntarily.

Project Insight (Since 2017) :

• Project Insight integrates Big data, AI and machine learning, Third-party information (SFTs, banks, registrars, GST, foreign exchanges).
• It cross-verifies reported income with actual financial behavior, significantly improving detection and voluntary compliance.

How AI Detects Non-Compliance

• Monitoring high-value transactions (property, securities, foreign remittances)
• Analysing spending patterns vs declared income
• Tracking portal activity and filing behavior
• Comparing past income-tax return trends to flag under-reporting or incorrect deductions
• Automated scrutiny under faceless assessment (Section 144B) ensuring impartial, tech-led allocation.
• Even small mismatches between Annual Information Statement, Taxpayer Information Summary and Form 26AS can now trigger system-generated notices.

Implications for Taxpayers & Professionals

• Manual audits may be fewer, but automated notices are rising
• Errors are identified early often before assessment proceedings
• December 31 deadline for revised income-tax return is a crucial compliance window
• Faceless systems mean documentation quality matters more than explanations

Compliance Takeaways

• Verify Annual Information Statement, Taxpayer Information Summary thoroughly before filing
• Avoid mechanical deduction claims substance over form matters
• Disclose foreign income and assets accurately
• Respond to nudges and notices within timelines
• Tax expert Proactive client advisories are no longer optional