15 Red Flags That Trigger Income Tax Return Scrutiny

Tax Return Scrutiny-

Many taxpayers find their income tax returns selected for audit, which often leads to complications, stress, and lengthy compliance procedures.

Although the National Board of Revenue (NBR) is currently not conducting full audits in most cases, it is actively issuing notices seeking clarification on various discrepancies found in tax files.

Here are 15 key reasons why an income tax return may fall under audit or close scrutiny:

1. Mismatch between return data and tax withholding records.
   Inconsistencies between declared income/expenses, withholding tax, or bank transactions compared to the return increase the likelihood of scrutiny.

2. Sudden and unusually high increase in assets.
   If assets rise sharply compared to previous years and the source of funds is not properly explained, suspicion increases.

3. Low income but high-value assets shown.
   Declaring a modest income while reporting expensive property or vehicles can trigger an audit.

4. Abnormally high business expenses.
   Inflated expenses with disproportionately low profit margins are a common audit trigger.

5. Incorrect or unclaimed withholding tax.
   Failure to claim TDS properly, or incorrect claims, often leads to tax file review.

6. Incomplete submission of documents.
   Missing or incorrect evidence for income, investment, expenses, or asset ownership raises red flags.

7. Excessive cash-in-hand shown.
   Unusually large amounts of cash declared may invite verification of the source.

8. Unexplained loans or liabilities.
   High levels of loans without proper documentation or explanation trigger audit attention.

9. Operating in high-risk industries.
   Sectors such as construction, contracting, supply, land/real estate, and automobile trading face tighter scrutiny.

10. Large bank transactions not reflected in the return.
    Significant deposits or withdrawals that do not align with the declared income raise concerns.

11. Undisclosed asset purchase or sale.
    Failure to report land, flats, vehicles, or other assets often leads directly to an audit.

12. Incorrect investment information.
    Overstated or misreported investments to claim benefits can trigger examination.

13. Random selection audits.
    Some taxpayers are audited under routine random sampling—even with no mistakes.

14. Large assets shown in the first return or after long gaps.
    Filing after many years or suddenly declaring major assets draws attention.

15. Previous audit issues.
    If earlier audits revealed discrepancies, the taxpayer is likely to be flagged again as high-risk.