Promised a big refund? This income tax expert says it may come with a 200% penalty

A growing number of Indian taxpayers are falling into what CA Nitin Kaushik calls the “tax refund trap”—a rising trend during ITR season where inflated refunds today could mean audits, penalties, and red flags tomorrow.

In a post on X, Kaushik warns of a quiet but dangerous scam playing out behind the scenes. “Some filers are being lured with promises of ‘extra refunds’—and it’s a ticking time bomb,” he wrote.

The tactic is simple but risky: tax consultants inflate refunds by manipulating deductions or income figures and charge clients a cut—typically 10%—of the artificially boosted amount. While these returns may pass the system initially, Kaushik says the relief is short-lived.

The Income Tax Department now uses AI to cross-verify returns against data from Form 16, AIS (Annual Information Statement), and TIS (Taxpayer Information Summary). Mismatches don’t always trigger instant alerts—but they’re flagged for future scrutiny.

“If it sounds too good to be true, it probably is,” Kaushik wrote.

Taxpayers who fall for the scheme may receive notices under Section 143(1) for refund reversal and demand, or Section 147 for reassessment with interest and penalties.

In many cases, the entire refund gets clawed back, a 200% penalty is levied on underreported income, and interest of 1% per month is added to the shortfall. Worse, the taxpayer’s profile is red-flagged—making future filings more prone to scrutiny.

Kaushik urges taxpayers to reject shortcuts: “Ethics in tax filing protect you from massive losses,” he noted. “One wrong refund isn’t free money—it’s a future liability in disguise.”