What is Underreporting and How It Works?

What is Underreporting and How It Works?


When an assessee under-reports their income, they submit a smaller amount of money as income on their tax returns than they actually made. If the assessee failed to submit a return detailing certain types of income—interest, capital gains, and so on—this could lead to under-reporting. The assessee may have failed to properly account for their revenue because they were either unaware of the existence of such funds or simply forgot to report them.

Click here to know which Items are not included in unreported income

  1. To what extent the assessee has adequately explained their revenue.
  2. Section 271AAB’s referenced amount of unreported income.
  3. If the accounts are complete and correct to the satisfaction of the relevant authority, but the manner adopted is such that income cannot legally be deducted therefrom, then the amount of under-reported income is the amount that was arrived at based on the estimate.
  4. The sum of money that should have been disclosed but wasn’t because of the arm’s length price established by the Transfer Pricing Officer, wherein,
  • The assessee had properly kept records in accordance with Section 92D.
  • Since the assessee has reported the international transaction in Chapter X,
  • The assessee had provided all relevant information about the deal.
  1. The amount of unreported income calculated based on an estimate, when the assessee has projected a smaller amount of addition / disallowance on the same issue. The assessee has revealed all relevant facts regarding the addition/disallowance and has included such amount in the computation of income.

Cost of False Reporting Penalty

If income is underreported, a penalty of up to fifty percent of the tax owed may be assessed. If your income is underreported, the IRS may impose a penalty of up to 200% of the tax that should have been paid. An assessee may, however, request to the Assessing Officer (AO) for immunity from the application of penalty, in which case the assessee would have to provide an explanation as to why the specific under-reported or misrepresented income was not notified. If the AO finds the respondent’s explanation to be reasonable, they may decide not to impose any penalties.All correspondence with the assessee must be done so in writing.

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