What Happens When You Don't File Your ITR?

In case an individual fails to file their Income Tax Return (ITR) by the due date (usually 31 July for individuals), a belated return can still be filed, subject to a late fee of up to Rs.5,000 under Section 234F, along with interest under Section 234A on any unpaid tax.

Customers who are late in filing their Income Tax Return will have to pay the applicable late fee and interest regardless of how late they are in a particular month. For instance, if the return is filed even a few days after the due date. the late fee under Section 234F still applies in full, and interest under Section 234A continues to accrue at 1% per month or part of a month on the unpaid tax.

A good number of taxpayers find themselves in the ostrich routine, particularly those who owe tax and aren’t able to afford payments. Such customers simply ignore filing, which is far from a good idea because they are merely delaying the inevitable.

Moreover, the IRS views non-filing of returns as a very serious offence – even worse than not paying tax. But the good thing about this penalty is that it cannot be more than 25% of the customer’s unpaid taxes. However, 25% is still a heavy penalty to pay for not filling out a form on time.

Non-Payment Penalty

Unpaid taxes are subject to their own charges. Even if a taxpayer files their return by the due date but fails to pay the tax owed, interest under Section 234B and 234C is levied at 1% per month or part of a month on the unpaid tax.

Similar to a non-filing penalty, a non-payment penalty is also calculated for each month, or parts of the month in which your tax bill remains unpaid. Again, like the non-filing penalty, this penalty can accrue until it hits 25% of the customer’s unpaid tax bill.

Penalty for Underreporting Income in ITR

Underpayment penalties are levied when a customer does not make the whole payment owed on tax. Taxes must be paid as income is earned, and most taxpayers comply with the rule for fear that income tax will be withheld from their paycheques.

However, independent contractors who work side jobs in addition to their salaried employment or as full time workers are responsible for ensuring that the tax due on their earnings are covered through estimated tax payments.

The payment of tax on time is also applicable to other incomes like stock options, investment earnings and prize winnings. Sometimes, individuals who get these different kinds of untaxed incomes pay the money they owe in one lump sum during the time of filing their taxes.

A portion of the earnings through such incomes must be paid to the IRS, and failure to do so will result in the levy of an underpayment penalty regardless of whether or not you eventually pay the whole tax due.

Ways to Avoid Tax Penalties

In case a taxpayer is liable for interest on underpayment of advance tax under Section 234C, they can avoid it by ensuring at least 90% of the assessed tax is paid by the end of the financial year: either pay taxes that are lesser of 90% of their present year’s tax liability or 100% of their previous year’s tax liability.

Majority of the taxpayers choose the previous year’s safe harbour as the payment on it is fixed while the 90% is considered a moving target.

Individuals with salaried jobs can also compensate for an estimated tax shortfall by simply raising their withholding there. Married couples receive an additional option and if they file their returns together, the withholding of a spouse will cover any scarcity of estimated taxes due on the untaxed income of the wife or husband.

Another way to avoid interest under Section 234C is to use the annualised income method for advance tax computation where income (such as capital gains) is received unevenly through the year, as permitted under the Income Tax Act.

If the customer received a sizeable income at the year’s end, it will only be counted for the fourth quarter, but annualising confirms that the customer had the right amount in the first three quarters and only required to pay the higher estimated amount in the final quarter.

Interest and Other Tax Penalties under the Income Tax Act

The Income Tax Department may, under Section 273A/273AA, waive or reduce penalties for taxpayers who voluntarily and fully disclose income and cooperate with the assessment. However, even where penalty relief is granted, interest charges under Sections 234A/234B/234C will still be levied on unpaid taxes.

Since interest is statutory, it is not generally abated. For general non-filing and non-payment situations, the prevailing interest rate is 1% per month (simple interest, not compounded) -  meaning that it can accrue quickly, similar to the tax penalties levied on non-filing and non-payment of taxes. Customers can avoid these tax penalties with ease by merely efiling income tax their Income Tax Return on time.

Sections that offer immunity against tax penalties

If a huge sum of cash is deposited in your account, the income tax department can send a notice to you and ask about the source of that amount. In case you are unable to explain things properly and lack sufficient proof of legitimacy of the cash, then you will be facing prosecution and penalties according to the rules under the Income Tax Act.

As per observations, if an individual completely cooperates with the income Tax Department and discloses all the information about the hidden income then the A.O. (Assessing Officer) may grant immunity to that individual as permitted under the IT Act. However, the final call on whether an individual gets immunity against tax penalties or not depends on the decision of the Income Tax authority. The sections that ca offer immunity against tax penalties are as follows:

• Section 270AA - This particular Section offers immunity against prosecution under 276CC and 276C. It also provides immunity against penalty under Section 270A. The individual must agree with the income that has been assessed by the Assessing Officer under Section 147 or 143(3). The tax and the interest must be paid by the individual with the specified time period in the demand notice under Section 156. The individual must file an application seeking immunity from prosecution and penalty. If the Assessing Officer passes an order by accepting the application then the individual will be able to enjoy immunity against prosecutions and penalties.
• Section 273A - This particular section does not offer immunity from penalty but the CIT (Commissioner of Income Tax) can choose to decrease or waive the entire penalty. However, the individual must disclose all unaccounted income voluntarily and makes required payments towards taxes and interest before the Assessing Officer comes to know of such income.
• Section 245L from Section 245C - An individual can choose to apply for the ITSC after his/her true income has been disclosed. If the income that is disclosed exceeds an amount of Rs.10 lakh, then a fee of Rs.500 will be required while filing the application. The ITSC holds the power to make you immune against penalties and prosecutions.
• Section 273AA - This Section can offer complete immunity against all penalties. If an individual files an application for settlement to the ITSC and it has been rejected by the ITSC, then an application can be sent to the Commissioner of Income Tax seeking immunity against penalties. Immunity can be granted by the CIT, but it will be withdrawn in case the individual does not follow all the conditions which are a requirement for the granting of immunity.
• Section 273B - Under this section, penalties are not imposed on an individual if the cause of tax payment failure is reasonable. However, if the penalty falls under Section 270A, then penalties will be imposed.