As AI reshapes the way tax returns are scrutinized, understanding its impact and preparing accordingly has become imperative for taxpayers and tax professionals alike.”
The Shift Towards AI in Scrutiny-Taxpayers Need to Know for AY 2025–26
In a bid to enhance efficiency and reduce human error, the Central Board of Direct Taxes (CBDT) is incorporating Artificial Intelligence (AI) into the scrutiny process for Assessment Year (AY) 2025–26. This move marks a significant departure from the traditional, manual scrutiny method and signals a new era in tax compliance.
The transition to AI-based scrutiny will drastically reduce delays and inconsistencies, but it also imposes higher scrutiny on the accuracy of tax filings. Taxpayers and tax professionals must understand the system’s intricacies to avoid potential issues.
AI-Based Scrutiny Operates: A Breakdown of the Process
1. Data Aggregation Across Multiple Sources:
AI will pull data from various sources, such as PAN records, AIS/TIS (Annual Information Statement / Taxpayer Information Summary), GST filings, bank statements, property transactions, and even past tax returns. This comprehensive data collection forms the foundation for automated scrutiny.
2. Risk Scoring: Identifying High-Risk Returns:
Each tax return will be assigned a risk score based on discrepancies or anomalies found across the data. Key risk indicators may include:
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Mismatched income details between forms (e.g., Form 16, AIS, Form 26AS).
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Unexplained transactions like large cash deposits or high-value purchases.
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Inflated or disproportionate deductions that don’t align with reported income.
A higher risk score will increase the likelihood of a return being flagged for further manual review.
3. Automated Flagging and Notices:
Returns identified as high-risk will be flagged for scrutiny. In some cases, AI will generate automated notices for review. However, the final decision on these notices will still rest with human officers.
AI Scrutiny Triggers by Raising Red Flags in Your Tax Return
1. Mismatched Income Reporting:
If the income reported in your ITR doesn’t align with the data available in Form 16, Form 26AS, or AIS, the AI system will detect these discrepancies immediately, triggering scrutiny.
2. Unjustified Large Transactions or Cash Deposits:
Any cash deposits or high-value transactions that appear inconsistent with your declared income will automatically raise flags. AI checks these against your financial history for anomalies.
3. Disproportionate Claims for Deductions:
Claims for deductions under sections like 80C, 80D, etc., that are too high compared to your income, will be scrutinized. The AI system will verify if these deductions are justifiable based on your financial status.
4. Property Purchases and Foreign Travel:
AI will cross-check significant property purchases or foreign travel expenses with your reported income. Any inconsistency in these areas could trigger scrutiny.
5. Non-Disclosure of Foreign Assets and Income:
AI can flag undeclared foreign income and foreign assets based on global financial data. Even minor omissions in these areas can lead to significant scrutiny.
Prepare for AI Scrutiny: Key Steps to Ensure a Smooth Filing
1. Cross-Check Your Data:
Before filing, ensure that the data in your AIS/TIS, Form 16, and other relevant documents aligns with your ITR. Double-check for any discrepancies that could lead to AI picking up mismatches.
2. Document All Deductions and Exemptions:
Ensure thorough documentation of deductions, exemptions, and expenses. AI will scrutinize these claims, so ensure they are consistent with your income and properly supported by documentation.
3. Justify Large Transactions:
Be prepared to justify large cash deposits or property purchases with the proper documentation, ensuring these are in line with your declared income.
4. Declare All Foreign Income and Assets:
Always disclose foreign assets and foreign income. The AI system cross-references global data, and hiding or omitting these details is a significant risk.
5. Use Technology to Spot Inconsistencies:
Leverage AI-powered tools designed to identify discrepancies before filing. These tools can help you quickly spot and rectify errors in your tax return, reducing the chances of AI scrutiny.
The Impact of AI Scrutiny: What This Means for Taxpayers and Professionals
For Taxpayers:
The introduction of AI scrutiny makes tax filing more transparent, but it also requires an unprecedented level of accuracy. Small errors or omissions could now trigger automated reviews, so ensuring that your returns are complete and error-free is paramount.
For Chartered Accountants (CAs):
The role of CAs has evolved from merely preparing tax returns to acting as auditors who must ensure that all data is consistent and accurate. The increased use of AI means that errors that might have been overlooked in the past are now more likely to be caught. Proactive, meticulous checks are now a fundamental part of the process.
Navigating the Future of Tax Filing with AI
As AI-based scrutiny becomes the norm for AY 2025–26, taxpayers and professionals alike must prioritize accuracy, completeness, and full disclosure. This shift towards automation in tax filing aims to enhance efficiency and transparency, but it also brings greater responsibility for those filing returns.
Action Points for a Seamless Filing Experience:
Ensure consistency between your AIS/TIS and ITR data.
Document all claims for deductions, exemptions, and expenses meticulously.
Fully disclose foreign income and assets.
“The era of AI-powered scrutiny is here. While it makes tax filing smarter, it requires precision and transparency from both taxpayers and their professionals.”
