FBR introduces rules for electronic scrutiny of taxpayers

The Federal Board of Revenue (FBR) has announced plans to introduce artificial intelligence (AI) into the scrutiny of individual tax returns. This automated system will be capable of identifying factual and legal errors and discrepancies within tax returns before any legal or penal action is taken. The proposed rules, titled “38-B Procedure for electronic scrutiny and intimation of issues detected by the automated system”, are currently in draft form and will be finalized after a period of stakeholder feedback.

The new system will conduct automated analysis and cross-matching of data from income tax returns with other available information. This will enable the system to flag potential discrepancies and issues for taxpayers to clarify. Through the IRIS portal, taxpayers will receive online advice or advance intimation regarding the discrepancies, highlighting any factual or legal mistakes they may need to address.

The purpose of this automated detection is to allow taxpayers to clarify issues and rectify errors or take corrective action before any legal or penal proceedings commence.

However, it's important to note that the mere detection of a discrepancy by the automated system will not trigger enforcement action. Taxpayers will first be notified electronically about the discrepancies in their income tax returns, allowing them a response period of at least seven days to clarify or rectify the issue. If the taxpayer fails to respond within this period, reminder notices will be issued, providing an additional seven-day window for response.

The officer of the Inland Revenue, based on jurisdiction over the taxpayer, will evaluate the taxpayer's response or the absence of a response before determining any further action under the provisions of the Income Tax Ordinance and rules. This proposed arrangement effectively introduces an automated scrutiny layer following the processing of income tax returns, while still maintaining the role of tax officers in determining whether a discrepancy warrants action under the law.