Responding to Tax Notices for Underreported Freelance Income and Filing Corrected Returns
- Bhavika Rajput
- Jun 4
- 8 min read
Freelancers often receive payments from multiple clients through various modes of bank transfers, UPI, or platforms, and may unintentionally miss reporting some of this income while filing their ITR. Even small omissions can trigger a tax notice under the Income Tax Act, 1961. Sections like 143(1), 143(2), 148, or 133(6) are commonly invoked when discrepancies arise between the income reported and what appears in Form 26AS, AIS, or bank statements. These notices may flag underreported income, mismatched entries, or missing tax payments. Ignoring them can lead to serious consequences, including hefty penalties, interest, and even prosecution in extreme cases. Responding correctly begins with reading the notice carefully, gathering all documents such as invoices and statements, and comparing reported vs. actual income. If there’s an error, a revised return under Section 139(5) or an updated return under Section 139(8A) must be filed with payment of applicable dues. Prompt and accurate action is key to avoiding legal hassles and maintaining tax compliance as a freelancer.
Table of Contents
Common Types of Tax Notices Freelancers Receive
Freelancers often receive various types of tax notices from the Income Tax Department, each corresponding to different issues in their income tax return. Below are the most common ones:
Section 143(1): This is a preliminary intimation where the system auto-checks for discrepancies between your filed return and the data with the department. It serves as a first step in verifying the accuracy of the filed return. Common triggers include mismatches with TDS (Tax Deducted at Source) or underreported bank credits. It is important to check the department's records and ensure that they align with your tax return.
Section 143(2): A scrutiny notice is a detailed examination of your return. If the department identifies inconsistencies or discrepancies in your filed return, like suspicious deductions or unexplained sources of income, this notice is issued. It often follows after red flags are raised during an initial auto-check (Section 143(1)). Responding to this notice requires submitting more detailed information and documentation to justify your returns.
Section 148: Known as a re-assessment notice, this is issued when the Income Tax Department believes that income has ‘escaped assessment.’ This can happen when income that should have been declared has not been reported. It can be triggered by unreported bank transactions, failure to include all income sources, or discrepancies in client payments reported in your returns versus what the department's records show. Upon receiving this notice, you must explain the discrepancies or file a revised return.
Section 133(6): This notice is often issued to seek specific information or documents that are required to verify your deductions, income sources, or to clarify any anomalies found in the Annual Information Statement (AIS) or Form 26AS. These documents are crucial for the department to validate your income and deductions, ensuring compliance with the tax laws.
Step-by-Step Process to Respond to Income Tax Notices
When a freelancer receives a tax notice, timely and accurate action is essential to avoid penalties. Follow these steps to effectively respond:
Understand the Notice Section: First, carefully read the notice to understand why it was issued and under which section. The notice will typically specify the discrepancy and provide a detailed explanation of the issue. This helps you understand whether the issue is a mismatch in TDS, unreported income, or missing documentation.
Collect All Documentation: Gather all the necessary documents that will support your response. This includes invoices, payment receipts, contracts, bank statements, TDS certificates, and any other relevant financial records. Having all this paperwork will help reconcile the discrepancies and offer a clear explanation to the authorities.
Reconcile Your Income: Compare the income reported in your filed return with the data in Form 26AS and your bank statements. If there are discrepancies or omissions, identify where the income was missed or misreported. This step will allow you to fix the discrepancies before submitting your response.
Draft a Response: Prepare a detailed response that addresses each concern raised in the notice. Ensure that you provide a point-by-point explanation of any discrepancies, and attach all relevant supporting documents to substantiate your claims. Be clear and concise, and ensure that you provide explanations for any income or deductions that may have been misreported.
File Corrected Return If Needed: If the reconciliation shows that there were errors or omissions in your initial filing, you need to file a revised return. This can be done under Section 139(5) if you are still within the filing deadline. If the deadline has passed, you can file an updated return under Section 139(8A), but this requires the payment of any additional taxes and interest.
Submit on the e-Filing Portal: Once your response is ready, upload it on the e-filing portal using the ‘e-Proceedings’ tab. Along with your response, attach all supporting documents that were mentioned in your explanation. This is a critical step to ensure your submission is accepted and processed by the department.
Track the Outcome: Monitor your account for updates on the portal, which will inform you whether your response has been accepted, if additional clarifications are needed, or if the case has been closed. Keep an eye on any follow-up queries from the department and ensure that you respond promptly.
Filing Corrected or Updated Returns for Freelance Income
If a freelancer realizes that income was missed or incorrectly reported in the tax return, they can take the following actions to rectify the mistake:
Filing a Revised Return: Under Section 139(5), freelancers can file a revised return to correct any unintentional omission or misstatement, provided they do so within the specified due date. The revised return should be filed using the same form that was originally submitted, and it will replace the original return.
Filing an Updated Return: If the deadline for filing a revised return has passed, freelancers can file an updated return under Section 139(8A). This option is available within 24 months from the end of the relevant assessment year. While filing an updated return, additional tax and interest may need to be paid based on the corrected income and deductions.
Filing these returns not only corrects the freelancer's records but also minimizes penalties and reduces the risk of further scrutiny by the tax department. It’s essential to ensure that these corrections are made as soon as possible to avoid further complications.
Penalties for Underreporting or Misreporting Freelance Income
Failing to accurately report income or deductions can lead to severe financial penalties. Below is an overview of the potential penalties a freelancer might face:
Example: For unreported freelance income of ₹4,00,000 attracting ₹1,20,000 in tax, the penalty could be:
₹60,000 for underreporting (50% of the tax on the unreported income), or
₹2,40,000 for misreporting (200% of the tax on the misreported income).
These penalties can significantly increase your tax liabilities, making it crucial to file accurate returns and promptly address any discrepancies.
What Happens if You Ignore the Tax Notice?
Ignoring a tax notice can lead to serious consequences. Here’s what might happen if you fail to respond:
Ex-parte Assessment: If you do not respond to the tax notice within the specified time, the officer may conduct an ex-parte assessment, which means the assessment will proceed without your input or explanation.
Additional Tax Demand, Disallowed Deductions, and Penalties: If the department believes that taxes have been underpaid, additional tax demands can be raised. Moreover, any deductions that were claimed but are found to be unsupported may be disallowed, increasing the total taxable income. This may result in higher tax liability.
Risk of Prosecution for Severe Misreporting or Tax Evasion: In cases of severe misreporting or deliberate tax evasion, there is a risk of prosecution under the Income Tax Act, which could lead to criminal penalties.
Loss of Opportunity to Correct Errors Voluntarily: By ignoring the notice, you forgo the opportunity to correct any errors voluntarily. Responding to the notice promptly gives you the chance to correct discrepancies and avoid harsher penalties or legal consequences.
In conclusion, responding to a tax notice within the specified timeline (usually 15 to 30 days) is essential. It allows you to address errors, file corrections, and avoid severe penalties, ensuring compliance with the tax laws.
How TaxBuddy Helps Freelancers Handle Tax Notices
Managing tax notices can be daunting for freelancers juggling multiple income sources. That’s where TaxBuddy simplifies the process:
Helps decode the notice type and its implications.
Offers guided steps for document collection and response drafting.
Enables corrected return filing through both self-filing and expert-assisted options.
Tracks submission status and handles follow-ups.
TaxBuddy’s mobile app ensures you don’t miss deadlines and helps you maintain clean compliance all in a few taps.
Conclusion
Tax notices for underreported freelance income aren’t uncommon—but they’re not unmanageable either. With the right steps, even complex notices can be resolved efficiently. It begins with reviewing the notice carefully, reconciling data, and filing a corrected or updated return as required. Timely response reduces penalties and maintains your credibility as a taxpayer.
For freelancers seeking a smooth and reliable way to manage their tax filings and notices, download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
Frequently Asked Question (FAQs)
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy caters to a wide range of users by offering both self-filing options for those comfortable filing on their own and expert-assisted plans for those seeking professional help. Users can choose the mode that fits their confidence level and complexity of income sources, including freelance earnings.
Q2. Which is the best site to file ITR?
While the official government portal at incometax.gov.in is widely used, platforms like TaxBuddy are considered the best by many for their user-friendly design, personalized assistance, and support features—especially useful for freelancers dealing with multiple income streams.
Q3. Where to file an income tax return?
You can file your income tax return directly on the government website or through authorized ERIs (E-Return Intermediaries) such as TaxBuddy. As a government-authorized platform, TaxBuddy simplifies the process with guided steps, error checks, and expert support.
Q4. What is the penalty for underreporting freelance income?
If the underreported income is identified as unintentional, the penalty under Section 270A is 50% of the additional tax owed. If the department classifies it as deliberate misreporting, the penalty can go up to 200% of the tax amount due, along with interest under other applicable sections.
Q5. Can a revised return be filed after receiving a notice?
Yes, a revised return can be filed under Section 139(5) if the time window is still open. If the deadline has passed, an updated return under Section 139(8A) is the way to go. This updated return can be filed within two years from the end of the relevant assessment year.
Q6. What happens if a tax notice is ignored?
Ignoring a tax notice can escalate the issue. The assessing officer may proceed with an ex-parte assessment based on available data, leading to higher tax demands, loss of deductions, penalties, and, in serious cases, prosecution for non-compliance or tax evasion.
Q7. How does TaxBuddy support freelancers in handling notices?
TaxBuddy simplifies the entire notice handling process—from interpreting the section and gathering necessary documentation to drafting replies and submitting corrected returns. Its expert-assisted model ensures accurate, timely, and compliant responses, particularly helpful for freelancers unfamiliar with complex tax notices.
Q8. Can small unreported freelance payments trigger notices?
Yes, even smaller freelance transactions can prompt a tax notice if there's a mismatch between your declared income and the department’s data (Form 26AS or AIS). Regular reconciliation and proper documentation help reduce this risk significantly.
Q9. Do freelancers need a CA to respond to tax notices?
Not always. Many notices, especially under Section 143(1), can be addressed by the freelancer through guided platforms like TaxBuddy. However, if the notice is under scrutiny sections like 143(2) or 148, expert advice or CA assistance is highly recommended.
Q10. How long is the window to file an updated return?
Section 139(8A) allows taxpayers to file an updated return within 24 months from the end of the relevant assessment year. This gives freelancers ample time to correct unreported income, but interest and additional tax will apply.
Q11. Are there any interest charges apart from penalties?
Yes. Interest is charged under Sections 234B and 234C for defaults in advance tax payments or shortfall in tax liability. These are separate from penalties and accrue based on how late the tax payment is made.
Q12. Can TaxBuddy handle responses for scrutiny notices like 143(2)?
Absolutely. TaxBuddy offers specialized support for scrutiny notices under Section 143(2), helping users prepare thorough responses, upload documentation, and manage follow-ups—ensuring compliance without unnecessary stress.
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