What Happens If A Taxpayer Underreports Income By Mistake?

Underreporting income—whether intentional or accidental—can lead to penalties, interest, and tax audits. However, if the mistake is unintentional, taxpayers can rectify it through voluntary disclosure or filing a revised return, reducing the risk of legal consequences.

Consequences of Underreporting Income by Mistake:

1. Interest on Unpaid Tax (Section 234A, 234B, 234C of Income Tax Act)

If additional tax is due because of underreported income, interest is charged until the full tax is paid.

The interest rate is usually 1% per month on the unpaid tax amount.

2. Penalty for Underreporting (Section 270A of Income Tax Act)

If underreporting is detected before the taxpayer corrects it, a penalty of 50% of the tax due may be imposed.

If underreporting is considered intentional tax evasion, the penalty can go up to 200% of the unpaid tax.

3. Tax Audit or Scrutiny by the Income Tax Department

If the mistake is significant, the Income Tax Department may issue a notice for further verification.

Frequent mistakes can lead to detailed audits and higher scrutiny in future tax filings.

4. No Penalty for Genuine Mistakes (If Voluntary Disclosure Is Made)

If the taxpayer realizes the mistake before a tax notice is issued and corrects it, penalties can be waived.

The Income Tax Department is more lenient towards taxpayers who voluntarily disclose errors.

Steps to Correct an Underreporting Mistake:

1. File a Revised Return (Section 139(5))

If the mistake is identified before the tax assessment is completed, a revised return can be filed to correct the error.

This should be done before December 31 of the assessment year.

2. Voluntary Disclosure of Mistake

If a tax return has already been processed, the taxpayer can inform the tax department and pay the additional tax with interest.

This reduces the risk of penalties and audits.

3. Pay the Additional Tax and Interest Promptly

As soon as underreporting is discovered, the tax due along with interest should be paid to avoid further complications.

4. Keep Proper Documentation

Maintain records such as bank statements, salary slips, business invoices, or investment proofs to justify corrections.

5. Consult a Tax Professional

If unsure about the correction process, consulting a chartered accountant or tax consultant can help avoid further errors.

Example:

A salaried employee forgets to report rental income of ₹2,00,000 from a second house. Here's what happens:

• If they realize the mistake early, they can file a revised return (ITR-U) and pay the extra tax + interest.
• If the tax department detects it first, a penalty of 50% of unpaid tax may be imposed.
• If the mistake is seen as intentional tax evasion, the penalty may go up to 200% of the tax due.