Federal Board of Revenue (FBR) has begun extending the use of artificial intelligence to scrutinise individual income tax returns, enabling an automated system to detect factual and legal mistakes and discrepancies before any legal or penalty related proceedings are initiated. The draft rules are titled 38-B Procedure for electronic scrutiny and intimation of issues detected by the automated system, and they have been proposed through amendments to the Income Tax Rules 2002. According to the report, the draft rules will be finalised after three days, once feedback from stakeholders has been received. The proposal places an automated layer of review directly after the processing of income tax returns, while the tax officer continues to decide whether a discrepancy deserves action under the law.
A significant feature of the proposed arrangement is the automated analysis and cross matching of information that is available with tax authorities. The system will compare the details declared in income tax returns with other available data and flag potential discrepancies so that taxpayers can clarify them. Once an issue is identified, the automated system will send online advice or an advance intimation to the taxpayer through the IRIS portal, pointing out the factual or legal mistake or discrepancy. The purpose is to allow taxpayers to clarify the matter, rectify errors or take corrective action before legal or penalty proceedings are started. The detection of a discrepancy by the automated system will not, by itself, result in enforcement action against the taxpayer.
Under the proposed mechanism, taxpayers will first be informed electronically about the discrepancies detected in their income tax returns and will be given an opportunity to clarify or rectify them through a prescribed process. The system generated advance intimation may also be sent by the officer of Inland Revenue who has jurisdiction over the taxpayer. Each intimation will specify a response period of at least seven days, during which the taxpayer can explain the position or correct the discrepancy. If the taxpayer does not respond within that stipulated period, another reminder will be issued, which will provide a further period of at least seven days for a response. This two stage sequence of notice and reminder gives taxpayers repeated chances to address an issue before any further step is considered.
After the response period ends, the officer of Inland Revenue having jurisdiction over the taxpayer will analyse the response, or the absence of a response, before taking appropriate action under the relevant provisions of the Income Tax Ordinance and rules. The proposed arrangement therefore adds an automated scrutiny layer immediately after income tax returns are processed, yet it keeps the tax officer responsible for judging whether a flagged discrepancy warrants action under the law. In practice, the system identifies and communicates the issue, the taxpayer is given time to respond, and the officer makes the final assessment of the matter. The draft is expected to be finalised shortly, after which the automated scrutiny process will operate under the notified rules.
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