Reporting errors, not evasion, spark most tax litigations, say experts

This is a Mint Premium article gifted to you.Subscribe to enjoy similar stories.

As tax filing becomes increasingly data-driven, many disputes now stem from reporting mismatches rather than tax evasion. Mint asked two tax experts what taxpayers can do to avoid such disputes and what policy changes could ease the compliance burden. Here's what they said

What is the most avoidable source of tax litigation between individual taxpayers and the tax department, and what is the biggest compliance burden that requires a policy change rather than better taxpayer awareness?

The most avoidable source of tax litigation between individual taxpayers and the department is disagreement over how income and investments are classified and reported in the tax return. Common examples include disputes over whether income should be taxed as capital gains or business income, the treatment of gifts and loans, and failure to report foreign assets or income from digital platforms. Many such disputes arise not from any mala fide intention but because of ambiguous facts or differing interpretation of the Income-tax rules by assessing officers.

Another common source of litigation is the mismatch between information reported by banks, employers, brokers and other institutions (through Form 26AS and AIS) and the taxpayer's own ITR, particularly around TDS credit, capital gains from mutual funds and securities, and interest income reported by multiple banks. Many tax notices issued while processing returns, and the reassessment proceedings that sometimes follow, arise not because of deliberate concealment but due to differences in reporting timelines, deductors quoting the wrong PAN, or taxpayers being unaware that a bank or employer has reported an amount different from what they disclosed in their return.

Many of these disputes are avoidable through better taxpayer education and a thorough reconciliation of the AIS/TIS before filing the ITR. Employers and banks can also reduce litigation by improving the accuracy and timeliness of their TDS filings.

However, taxpayers continue to face one compliance burden that awareness alone cannot solve--completed tax assessments can still be reopened years later and requests to correct mistakes often remain pending for months under Section 154 of the Income-tax Act, 1961 (or Section 287 of the Income-tax Act, 2025). Even fully compliant taxpayers may find their assessments reopened years later on technical grounds or their rectification requests pending for months without a statutory timeline.

A meaningful policy solution would be to prescribe a statutory timeline for disposing of rectification applications, along with stricter and more clearly defined conditions for reopening past assessments. This would reduce compliance costs and litigation for individual taxpayers without requiring any change in taxpayer behaviour.

One of the most common reasons for tax disputes today is not tax evasion, but a mismatch between the information available with the tax department and the way taxpayers report it in their tax returns. Over the last few years, the Annual Information Statement (AIS) has significantly improved transparency by bringing together data from banks, employers, brokers and other institutions. This is a welcome development.

Yet many taxpayers continue to receive notices because a transaction has been reported differently or disclosed elsewhere in the return. In several cases, the issue is one of reconciliation rather than non-compliance.

The Income Tax Department's NUDGE (non-intrusive usage of data to guide and enable) initiative is a step in the right direction. By encouraging taxpayers to review and correct potential inconsistencies before enforcement action is initiated, it acknowledges that many compliance gaps arise from reporting differences rather than deliberate non-compliance.

Yet, there is scope to go one step further. Since the relevant information is often already available to both the tax...