FBR to offer AI-driven digital tax settlements without physical intervention under new legal framework
ISLAMABAD: The federal government has introduced a landmark digital tax reform through the Finance Act, 2026 by empowering the Federal Board of Revenue (FBR) to settle tax disputes using an algorithmic mechanism without physical intervention by tax officials.
The Finance Act inserts a new Section 134B and amends Section 114 of the Income Tax Ordinance, 2001 to establish a digitally operated algorithmic settlement mechanism for taxpayers willing to voluntarily revise their income tax returns.
The initiative forms part of the government’s broader digital transformation agenda aimed at improving tax compliance, reducing litigation and minimising direct interaction between taxpayers and tax authorities.
Revised returns without Commissioner’s approval
A new sub-section (6B) of Section 114 allows taxpayers accepting an algorithmic settlement offer to file a revised return without obtaining prior approval from the Commissioner Inland Revenue.
Under the new provision:
• The Commissioner’s approval will not be required for filing the revised return.
• The taxpayer will only be required to pay the tax amount determined through the algorithmic settlement mechanism.
• No separate penalty or default surcharge will be imposed.
• The revised return must be accompanied by the prescribed documents and will be treated as a valid revised return under the Income Tax Ordinance.
Digital settlement mechanism
The newly inserted Section 134B authorises the FBR to establish a digitally operated algorithmic settlement mechanism for resolving tax proceedings before the issuance of an assessment or amended assessment order under Sections 121, 122 or 122E of the Income Tax Ordinance.
The mechanism will generate settlement offers enabling taxpayers to voluntarily revise their returns and settle disputes electronically.
How settlement offers will be determined
According to the Finance Act, the system-generated settlement offer may be calculated on the basis of several factors, including:
• The stage of tax proceedings at which the settlement is offered.
• The taxpayer’s compliance history maintained in the FBR’s database.
• The nature of the discrepancy, including valuation disputes, legal interpretation issues, unexplained income or assets, or concealment.
• Any other criteria considered appropriate by the FBR to ensure revenue adequacy and equitable treatment of taxpayers.
Acceptance process
Taxpayers choosing to avail the mechanism will be required to complete the process within 10 days of receiving the settlement offer by:
• Accepting the offer through the FBR’s IRIS portal.
• Depositing the settlement amount.
• Filing a revised return incorporating the agreed adjustments.
Effect on ongoing proceedings
Once a taxpayer accepts the offer and files the revised return, proceedings initiated through a notice of audit selection, unexplained income proceedings under Section 111, audit reports under Section 177 or amendment notices under Section 122 relating to the settled issues will automatically stand abated.
However, the Finance Act clarifies that accepting an algorithmic settlement will not prevent the FBR from pursuing proceedings relating to other discrepancies not covered by the settlement offer or matters concerning other tax years.
Digital transformation of tax administration
The introduction of algorithmic settlement represents one of the most significant reforms contained in the Finance Act, 2026, reflecting the government’s push towards technology-driven tax administration.
By enabling automated settlement offers based on data analytics and predefined risk parameters, the FBR aims to accelerate dispute resolution, reduce administrative costs, improve voluntary compliance and minimise direct interaction between taxpayers and tax officials while ensuring fair and transparent treatment under the tax system.
