diff --git a/src/libs/OptionsListUtils.ts b/src/libs/OptionsListUtils.ts
index f1bdac4a24948..ec4fe88a9ef08 100644
--- a/src/libs/OptionsListUtils.ts
+++ b/src/libs/OptionsListUtils.ts
@@ -165,7 +165,7 @@ type GetOptionsConfig = {
     includeSelectedOptions?: boolean;
     includeTaxRates?: boolean;
     taxRates?: TaxRatesWithDefault;
-    policy?: OnyxEntry<Policy>;
+    policy?: OnyxEntry<Policy> | EmptyObject;
     transaction?: OnyxEntry<Transaction>;
     includePolicyReportFieldOptions?: boolean;
     policyReportFieldOptions?: string[];
@@ -1383,7 +1383,7 @@ function getTaxRatesOptions(taxRates: Array<Partial<TaxRate>>): TaxRatesOption[]
 /**
  * Builds the section list for tax rates
  */
-function getTaxRatesSection(policy: OnyxEntry<Policy> | undefined, selectedOptions: Tax[], searchInputValue: string, transaction?: OnyxEntry<Transaction>): TaxSection[] {
+function getTaxRatesSection(policy: OnyxEntry<Policy> | EmptyObject, selectedOptions: Tax[], searchInputValue: string, transaction?: OnyxEntry<Transaction>): TaxSection[] {
     const policyRatesSections = [];
 
     const taxes = TransactionUtils.transformedTaxRates(policy, transaction);
@@ -1705,7 +1705,7 @@ function getOptions(
     }
 
     if (includeTaxRates) {
-        const taxRatesOptions = getTaxRatesSection(policy, selectedOptions as Tax[], searchInputValue, transaction);
+        const taxRatesOptions = getTaxRatesSection(policy ?? {}, selectedOptions as Tax[], searchInputValue, transaction);
 
         return {
             recentReports: [],
diff --git a/src/libs/PolicyUtils.ts b/src/libs/PolicyUtils.ts
index c234a61bdbd91..7672be56d1020 100644
--- a/src/libs/PolicyUtils.ts
+++ b/src/libs/PolicyUtils.ts
@@ -265,7 +265,7 @@ function isPaidGroupPolicy(policy: OnyxEntry<Policy> | EmptyObject): boolean {
     return policy?.type === CONST.POLICY.TYPE.TEAM || policy?.type === CONST.POLICY.TYPE.CORPORATE;
 }
 
-function isTaxTrackingEnabled(isPolicyExpenseChat: boolean, policy: OnyxEntry<Policy>): boolean {
+function isTaxTrackingEnabled(isPolicyExpenseChat: boolean, policy: OnyxEntry<Policy> | EmptyObject): boolean {
     return (isPolicyExpenseChat && (policy?.tax?.trackingEnabled ?? policy?.isTaxTrackingEnabled)) ?? false;
 }
 
diff --git a/src/libs/TransactionUtils.ts b/src/libs/TransactionUtils.ts
index aa9a874049242..bb38f36808846 100644
--- a/src/libs/TransactionUtils.ts
+++ b/src/libs/TransactionUtils.ts
@@ -6,6 +6,7 @@ import CONST from '@src/CONST';
 import ONYXKEYS from '@src/ONYXKEYS';
 import type {Policy, RecentWaypoint, Report, TaxRate, TaxRates, Transaction, TransactionViolation} from '@src/types/onyx';
 import type {Comment, Receipt, TransactionChanges, TransactionPendingFieldsKey, Waypoint, WaypointCollection} from '@src/types/onyx/Transaction';
+import type {EmptyObject} from '@src/types/utils/EmptyObject';
 import {isEmptyObject} from '@src/types/utils/EmptyObject';
 import type {IOURequestType} from './actions/IOU';
 import {isCorporateCard, isExpensifyCard} from './CardUtils';
@@ -658,7 +659,7 @@ function getRateID(transaction: OnyxEntry<Transaction>): string | undefined {
  * Gets the tax code based on selected currency.
  * Returns policy default tax rate if transaction is in policy default currency, otherwise returns foreign default tax rate
  */
-function getDefaultTaxCode(policy: OnyxEntry<Policy>, transaction: OnyxEntry<Transaction>, currency?: string | undefined) {
+function getDefaultTaxCode(policy: OnyxEntry<Policy> | EmptyObject, transaction: OnyxEntry<Transaction>, currency?: string | undefined) {
     const defaultExternalID = policy?.taxRates?.defaultExternalID;
     const foreignTaxDefault = policy?.taxRates?.foreignTaxDefault;
     return policy?.outputCurrency === (currency ?? getCurrency(transaction)) ? defaultExternalID : foreignTaxDefault;
@@ -667,10 +668,9 @@ function getDefaultTaxCode(policy: OnyxEntry<Policy>, transaction: OnyxEntry<Tra
 /**
  * Transforms tax rates to a new object format - to add codes and new name with concatenated name and value.
  *
- * @param  policy - The policy which the user has access to and which the report is tied to.
- * @returns The transformed tax rates object.g
+ * @returns The transformed tax rates object
  */
-function transformedTaxRates(policy: OnyxEntry<Policy> | undefined, transaction?: OnyxEntry<Transaction>): Record<string, TaxRate> {
+function transformedTaxRates(policy: OnyxEntry<Policy> | EmptyObject, transaction?: OnyxEntry<Transaction>): Record<string, TaxRate> {
     const taxRates = policy?.taxRates;
     const defaultExternalID = taxRates?.defaultExternalID;
 
@@ -684,14 +684,23 @@ function transformedTaxRates(policy: OnyxEntry<Policy> | undefined, transaction?
 
     const getModifiedName = (data: TaxRate, code: string) =>
         `${data.name} (${data.value})${defaultTaxCode() === code ? ` ${CONST.DOT_SEPARATOR} ${Localize.translateLocal('common.default')}` : ''}`;
-    const taxes = Object.fromEntries(Object.entries(taxRates?.taxes ?? {}).map(([code, data]) => [code, {...data, code, modifiedName: getModifiedName(data, code), name: data.name}]));
-    return taxes;
+    return Object.fromEntries(
+        Object.entries(taxRates?.taxes ?? {}).map(([code, data]) => [
+            code,
+            {
+                ...data,
+                code,
+                modifiedName: getModifiedName(data, code),
+                name: data.name,
+            },
+        ]),
+    );
 }
 
 /**
  * Gets the tax value of a selected tax
  */
-function getTaxValue(policy: OnyxEntry<Policy>, transaction: OnyxEntry<Transaction>, taxCode: string) {
+function getTaxValue(policy: OnyxEntry<Policy> | EmptyObject, transaction: OnyxEntry<Transaction>, taxCode: string) {
     return Object.values(transformedTaxRates(policy, transaction)).find((taxRate) => taxRate.code === taxCode)?.value;
 }
 
diff --git a/src/libs/actions/IOU.ts b/src/libs/actions/IOU.ts
index 708060c481314..6a95ebd156385 100644
--- a/src/libs/actions/IOU.ts
+++ b/src/libs/actions/IOU.ts
@@ -6517,8 +6517,8 @@ function setMoneyRequestParticipantsFromReport(transactionID: string, report: On
     return participants;
 }
 
-function setMoneyRequestTaxRate(transactionID: string, taxCode: string) {
-    Onyx.merge(`${ONYXKEYS.COLLECTION.TRANSACTION_DRAFT}${transactionID}`, {taxCode});
+function setMoneyRequestTaxRate(transactionID: string, taxCode: string, isDraft: boolean) {
+    Onyx.merge(`${isDraft ? ONYXKEYS.COLLECTION.TRANSACTION_DRAFT : ONYXKEYS.COLLECTION.TRANSACTION}${transactionID}`, {taxCode});
 }
 
 function setMoneyRequestTaxAmount(transactionID: string, taxAmount: number, isDraft: boolean) {
diff --git a/src/pages/iou/request/step/IOURequestStepParticipants.tsx b/src/pages/iou/request/step/IOURequestStepParticipants.tsx
index 45e644607d349..a428949587bc0 100644
--- a/src/pages/iou/request/step/IOURequestStepParticipants.tsx
+++ b/src/pages/iou/request/step/IOURequestStepParticipants.tsx
@@ -4,9 +4,11 @@ import {withOnyx} from 'react-native-onyx';
 import FormHelpMessage from '@components/FormHelpMessage';
 import useLocalize from '@hooks/useLocalize';
 import useThemeStyles from '@hooks/useThemeStyles';
+import * as CurrencyUtils from '@libs/CurrencyUtils';
 import DistanceRequestUtils from '@libs/DistanceRequestUtils';
 import * as IOUUtils from '@libs/IOUUtils';
 import Navigation from '@libs/Navigation/Navigation';
+import {getPolicy, isTaxTrackingEnabled} from '@libs/PolicyUtils';
 import * as TransactionUtils from '@libs/TransactionUtils';
 import MoneyRequestParticipantsSelector from '@pages/iou/request/MoneyRequestParticipantsSelector';
 import * as IOU from '@userActions/IOU';
@@ -81,6 +83,31 @@ function IOURequestStepParticipants({
         IOU.navigateToStartStepIfScanFileCannotBeRead(receiptFilename ?? '', receiptPath ?? '', () => {}, iouRequestType, iouType, transactionID, reportID, receiptType ?? '');
     }, [receiptType, receiptPath, receiptFilename, iouRequestType, iouType, transactionID, reportID, action]);
 
+    const setTaxDetailsOnCategorizing = useCallback(
+        (participantsArray: Participant[]) => {
+            if (action !== CONST.IOU.ACTION.CATEGORIZE) {
+                return;
+            }
+
+            const isPolicyExpenseChat = participantsArray.length === 1 && participantsArray[0]?.isPolicyExpenseChat;
+            if (!isPolicyExpenseChat) {
+                return;
+            }
+
+            const policyID = participantsArray[0].policyID;
+            const policy = getPolicy(policyID);
+            if (!isTaxTrackingEnabled(isPolicyExpenseChat, policy)) {
+                return;
+            }
+            const taxCode = TransactionUtils.getDefaultTaxCode(policy, transaction) ?? '';
+            const taxPercentage = TransactionUtils.getTaxValue(policy, transaction, taxCode) ?? '';
+            const taxAmount = CurrencyUtils.convertToBackendAmount(TransactionUtils.calculateTaxAmount(taxPercentage, transaction?.amount ?? 0));
+            IOU.setMoneyRequestTaxRate(transactionID, taxCode, true);
+            IOU.setMoneyRequestTaxAmount(transactionID, taxAmount, true);
+        },
+        [action, transaction, transactionID],
+    );
+
     const addParticipant = useCallback(
         (val: Participant[]) => {
             IOU.setMoneyRequestParticipants(transactionID, val);
@@ -96,10 +123,13 @@ function IOURequestStepParticipants({
                 return;
             }
 
+            // If user is categorizing tracked expense with respective workspace on policy expense chat then update tax details on draft transaction
+            setTaxDetailsOnCategorizing(val);
+
             // When a participant is selected, the reportID needs to be saved because that's the reportID that will be used in the confirmation step.
             selectedReportID.current = val[0]?.reportID ?? reportID;
         },
-        [reportID, transactionID],
+        [reportID, transactionID, setTaxDetailsOnCategorizing],
     );
 
     const goToNextStep = useCallback(() => {
diff --git a/src/pages/iou/request/step/IOURequestStepTaxRatePage.tsx b/src/pages/iou/request/step/IOURequestStepTaxRatePage.tsx
index 9376aa65e4e66..66bb49156b4b7 100644
--- a/src/pages/iou/request/step/IOURequestStepTaxRatePage.tsx
+++ b/src/pages/iou/request/step/IOURequestStepTaxRatePage.tsx
@@ -91,7 +91,7 @@ function IOURequestStepTaxRatePage({
             return;
         }
         const amountInSmallestCurrencyUnits = CurrencyUtils.convertToBackendAmount(taxAmount);
-        IOU.setMoneyRequestTaxRate(transaction?.transactionID, taxes?.code ?? '');
+        IOU.setMoneyRequestTaxRate(transaction?.transactionID, taxes?.code ?? '', true);
         IOU.setMoneyRequestTaxAmount(transaction.transactionID, amountInSmallestCurrencyUnits, true);
 
         navigateBack();