The Income Tax Department has continuously been expanding the scope of monitoring tax evasion. Tax officials have scaled up the use of Artificial Intelligence (AI) and data analytics to enhance tax compliance and detect discrepancies in financial behaviour.

Now if you invest a large amount, buy property, or spend more than you spend on credit card, all these transactions are being monitored by the tax department, say tax experts.

Banks, mutual fund companies, registrars and other financial institutions give the ‘Statement of Financial Transaction (SFT)’ report to the department every year, which contains information about your high value transactions, according to CA (Dr.) Suresh Surana. Now this data is being combined with Income Tax Return (ITR), TDS, GST, and foreign transactions — and this is how it is being decided whether there is any irregularity in your income and expenses, Surana adds.

Also read: Income Tax Returns AY2025-26: 5 key things for first-time taxpayers to keep in mind while filing ITR

Use of AI for trend analysis and discrepancy detection

AI tools are used to perform comparative analysis of a taxpayer’s current and previous years’ Income Tax Returns (ITRs), he noted. By identifying patterns and detecting significant deviations or inconsistencies in income disclosures, deductions claimed, or sources of income, the system is capable of flagging potential cases of under-reporting or tax evasion, Surana further said adding this data-driven approach enhances the department’s ability to carry out risk-based assessments and ensures greater transparency and consistency in taxpayer behaviour over time.

AI is now analyzing your old and new tax filings

The Income Tax Department has now made tax scrutiny data-based and risk-focused. AI tools are now able to check how well your ITR of this year matches with the previous years. Have you shown less income or claimed more deductions? All these are now being analyzed automatically. With this, the tax department can decide in less time which case should be selected for investigation.

Along with this, now most of the assessments are becoming ‘faceless’ i.e. taxpayers do not need to meet officers face to face – the entire work is being done online and through the system. In this, with the help of AI, the selection process of cases is becoming more fair and transparent.

Shefali Mundra, Tax Expert, ClearTax, says, “The Income Tax Department of India is actively leveraging Artificial Intelligence to monitor financial transactions and enhance tax compliance. AI tools analyze vast datasets from various sources, including banks, mutual funds, GST filings, and Income Tax Returns (ITRs), to identify discrepancies and potential under-reporting.”

“Key initiatives like the Annual Information Statement (AIS) and Statement of Financial Transactions (SFT) enable the department to cross-reference reported income with actual financial activities. AI systems also assess risk profiles by comparing current and historical tax filings, facilitating targeted scrutiny,” she said.

This integration of AI into tax administration allows for real-time monitoring, efficient resource allocation, and a more transparent tax system, ultimately reducing manual interventions and encouraging voluntary compliance, according to Mundra.

Now the tax department will also enter the digital world

The department will get even more power in the new Income Tax Bill to be implemented from 2026. Now, if the authorities suspect that you have evaded tax through some digital means, they can check your social media accounts, emails, banking apps, trading platforms, and even online investment platforms.

According to Section 247 of the new bill, if needed, the authorities can access the data even by breaking the password. A new legal term called “virtual digital space” has also been added, which will include cloud storage, digital wallets, email servers and other platforms.

Also read: Income Tax: These 5 cash transactions can get you a notice from the tax department

Now caution is the biggest wisdom

After these changes, taxpayers will now have to be very cautious about their every financial transactions and digital presence. Keeping transparent records and following tax rules is no longer just an option, it has become a necessity.

With the advent of AI, the tax system has now become predictive, fraud-preventive and extremely accurate – that is, ‘predictive’, ‘preventive’ and ‘precision-based’. In such a situation, now even the smallest mistake will not be able to escape the eyes of the tax department.