Every year, many taxpayers try to reduce their tax liability by inflating or falsely claiming deductions in their income tax returns. Many people try to claim deductions for investments that they never made. This may include inflating medical or education expenses or showing fake receipts.
Even though these methods may seem like a very easy way to save tax, they can have serious consequences under the Income Tax Act. Depending on the gravity of the mistake, such taxpayers may be fined heavily, prosecuted or even jailed in cases of willful tax evasion.
The Income Tax Department has now become data-based and uses information from employers, banks, financial institutions and documents like Annual Information Statement (AIS) and Form 26AS to verify these claims made in tax returns every year.
What happens if the IT department finds an incorrect entry?
Under Section 271AAD of the Income-Tax Act, if during assessment or any other proceeding the tax department finds that a taxpayer has made any wrong entry in his account books or has deliberately not made any entry to reduce the tax liability, then heavy penalty can be imposed.
According to the Income Tax Department website, in such cases there is also a provision for a penalty equal to 100 percent of the value of wrong or omitted entries. This makes the cost of claiming false deductions or hiding income far greater than the potential tax savings.
Difference between under-reporting and mis-reporting of income
At the same time, Section 270A is related to under-reporting and mis-reporting of income. These provisions define the circumstances in which penalties can be imposed, the rates applicable and the safeguard measures for taxpayers.
Under-reporting of income refers to situations in which a taxpayer reports less income than is assessed by the tax authorities, often due to omission of information, incorrect claims or calculation errors.
Mis-reporting of income involves deliberate concealment or misrepresentation of facts. This includes matters like hiding income, showing fake expenses or not recording transactions.
Penalty for under-reporting and mis-reporting of income
Under-reporting of income: On such a mistake, a penalty of 50 percent of the tax payable on that income is imposed.
Mis-reporting of income: If a taxpayer misreports his income, a penalty of 200 percent more of the tax payable will be imposed. The Income Tax Department has implemented these rules to impose penalty on taxpayers who evade tax.
Can you go to jail for tax evasion?
When tax authorities determine that a taxpayer has knowingly tried to evade tax through fake deductions or false claims, then legal action can be initiated against that taxpayer under sections 276C and 277.
Under Section 276C, a person found guilty of willfully attempting to evade tax can be jailed for three months to seven years. The punishment depends on the amount of tax evaded.
Section 277 is related to giving wrong information in verification or documentation and for this, both jail and fine can be imposed. Legal action is usually taken in cases of large-scale fraud or repeated non-compliance. These often involve fake documents or professional intermediaries who help in making fake claims.
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