Up to 200% penalty for tax misreporting: What every filer should know

Misreporting or underreporting income can lead to penalties of up to 200 per cent of the tax due. Tax experts warn that even small errors may trigger scrutiny under the new AI-driven system.

Taxpayers who conceal income, omit sources, or inaccurately claim deductions may find themselves facing serious financial and legal consequences. Whether it’s an inadvertent error or a deliberate act, the Income Tax Department has a robust mechanism to detect mismatches and a legal framework that allows it to levy stiff penalties or initiate prosecution.

 

Two tax experts, Suresh Surana, a chartered accountant, and Shefali Mundra, a chartered accountant and tax expert at ClearTax, explain what the law says and what taxpayers need to watch out for.

 

What penalties apply for underreporting, misreporting or concealment?

According to Surana, penalties under different sections of the Income Tax Act depend on the nature of the discrepancy:

 

Underreporting (Section 270A): This attracts a penalty of 50 per cent of the tax payable on the underreported income.

 

Misreporting (Section 270A): If income is deliberately misrepresented, the penalty increases to 200 per cent of the tax on such income. This includes use of false invoices or fictitious claims.

 

Concealment (Section 271(1)(c)): Applicable to older assessment years (prior to FY 2016–17), where penalties can range from 100 per cent to 300 per cent of the tax evaded.

 

Unexplained investments (Section 271AAC): A 10 per cent penalty applies in addition to a 60 per cent tax plus surcharge and cess.

 

Wilful tax evasion (Section 276C): May invite prosecution with imprisonment from three months up to seven years, especially if the tax evaded exceeds ~25,00000.

 

Mundra adds that apart from these, interest penalties under Sections 234A, 234B, and 234C are also applicable for late filing, short payment, or deferment of advance tax.

 

How is underreporting typically detected?

 

Detection is no longer reliant on traditional audits.

 

Surana explains that the department uses data from the Annual Information Statement (AIS), Form 26AS, TDS filings, GST returns, and third-party reports such as those from banks, mutual funds, or property registrars. Any inconsistency between disclosed and reported transactions can trigger scrutiny.

 

Additionally, the system receives inputs under global information-sharing agreements, enabling detection of unreported foreign assets. Technology plays a key role here.

 

Mundra adds that AI-based risk models now analyse patterns across data points to flag returns with inconsistencies, unusual behaviour or repeated underreporting.

 

Can penalties be avoided if the error is corrected?

Yes, in certain situations.

 

Surana explains that if a taxpayer files a revised return under Section 139(5) or an updated return under Section 139(8A) before detection by the tax authorities, penalties may not apply, provided full tax and interest are paid.

 

Further, Section 270AA allows for immunity from penalties and prosecution where tax is paid and no appeal is filed. Courts have also accepted bona fide error or reasonable cause in some cases under Section 273B.

 

According to Mundra, voluntary correction and cooperation during assessment can play a significant role in avoiding penalty, especially if the non-compliance was unintentional.

 

The role of faceless and AI-driven assessments

 

Under the Faceless Assessment Scheme (Section 144B), cases are handled digitally with no physical interaction. Surana points out that the system enhances objectivity and transparency while allowing the department to pull in data from multiple digital sources to ensure consistency.

 

Mundra notes that AI and machine learning models are already in place to flag returns based on spending, reporting history, and third-party disclosures. The process may seem invisible, but it is highly automated and rigorous.