Claimed fake tax deductions? I-T dept's AI flags bogus HRA, loans claims, hefty penalties await

The Income Tax Department is stepping up its fight against fraudulent deduction claims with an aggressive approach, deploying advanced AI and data analytics to sift through tax filings meticulously. Already, more than 40,000 taxpayers have retracted fabricated entries totalling a staggering ₹1,045 crore. This significant development forms part of a comprehensive strategy aimed at eradicating fraudulent practices, especially those orchestrated by agents touting 'guaranteed refunds'. 

Authorities have uncovered extensive abuse of popular deduction sections, including House Rent Allowance (HRA) under Section 10(13A), donations under Section 80G, and loan interests under the various 80-series sections. "There has been a massive misuse of popular deduction sections like HRA under Section 10(13A), donations under Section 80G, and medical or educational loan interest under various 80-series sections. The department’s AI now cross-verifies these claims against TDS data, bank records, and other third-party sources," TaxBuddy, a prominent tax advisory platform, explained.

Recently, the Income Tax Return-Updated (ITR-U) form has seen a surge in usage as taxpayers scramble to adjust overstated deductions to avert penalties. The Income Tax Act lays down stringent consequences for the erroneous reporting of deductions, including penalties reaching 200% of the tax owed and interest rates soaring up to 24% annually. Serious violators might encounter prosecution, with possible imprisonment for up to seven years, particularly under Section 276C for deliberate evasion. 

The intensified scrutiny has exposed several taxpayers who have been misled by refund agents assuring large refunds via false claims. "Many taxpayers fell into the trap of refund agents, who claimed they could secure large refunds through false declarations," the TaxBuddy noted. The department's AI-driven systems promptly detect discrepancies between Income Tax Returns and income data from AIS and Form 26AS. "But now, with AI-driven scrutiny, mismatches between ITRs and income data from AIS and Form 26AS are being flagged instantly." 

The revised ITR forms for this assessment year require more detailed information to thwart manipulation, pushing taxpayers to submit comprehensive documentation. "Even a small mismatch in this data can trigger an automated notice," warned TaxBuddy, stressing the importance of thorough documentation. "It's no longer enough to just fill the forms — you need to have solid documentation to back every claim." Taxpayers are cautioned against relying on questionable refund agents and are encouraged to keep exhaustive records to validate their claims. 

TaxBuddy recommends the prompt filing of an ITR-U to rectify any discrepancies and avert potential penalties. "Filing an ITR-U now can save you from harsh penalties and prosecution later," they advised, underlining this period as an optimal moment to amend previous mistakes before authorities ramp up enforcement. "This window is your best chance to correct any errors, misreporting, or false deductions from past returns — before the department knocks on your door." The advancements in AI oversight signify a pivotal shift, marking the conclusion of 'easy refunds' acquired through fraudulent means.