Though we require filing income tax returns (ITR) every year, we are still prone to errors. There are some errors which are often made by most individuals. But one should always avoid making such mistakes.
Non-reporting of actual income for taxation as an error
If someone has filed his tax return but has concealed his actual income, then he might be prosecuted. The income tax department is now prosecuting people for concealing their actual income.
The income tax department reaches individuals when they purchase expensive products. If someone has concealed his actual income, he cannot escape section 276 of the Income Tax Act according to which any person concealing his income shall be punishable with imprisonment up to two years and shall also be liable to penalty.
Failing to report income is a serious issue as viewed from the eyes of the tax authorities. Though the IRS in reality sends few people to jail, but they frequently impose the penalties. The methods of collection of the unpaid taxes and penalties of the Income Tax Department can be crushing. It is in fact unfair not to report the actual income by an assessee.
Failure in reporting the sources of income – The most common error that is made by tax payers is failure in reporting all the sources of income. The most common type of income many people fail to declare is interest earned in bank savings accounts and on Fixed Deposits. This income is taxable as banks deduct 10% as Tax Deductible at Source on the said interest.
Failure to report such incomes might result in issuing a notice from the income tax department. Again if an individual changes his job recently, he should also report the income earned from his previous employer.
Failure in reporting exempt income – Incomes like dividends and long-term capital gains on some specified securities are not liable to be taxed. But one must report them in their tax return as the details are provided to the tax department by the companies and firms.
Consequences of failure in reporting income:
If someone fails to report an amount in the current year’s return and also failed to report any amount in any one out of the last three years, he might be liable to pay a federal as well as provincial penalty. This is known as repeated failure to report income penalty.
In such cases the individual has to pay –
(i) A federal penalty amounting to 10% of the unreported amount, and
(ii) A provincial penalty amounting to the equal amount.
Intentionally making a false statement or omission:
One is also liable to pay a penalty if he knowingly makes any false statement or omission in his tax return.
The penalty often amounts to 50% of the under assessed tax and/or the over estimation of credits in connection with the false statements or omissions.
If someone repeatedly fails to report his total income on his income tax return, he is liable to pay a federal penalty amounting to 10% along with provincial penalty amounting to 10% on the unreported amount.