You are required to keep all supporting documents and records to support the Income Tax Returns filed for a minimum of six years after the date on which the original tax return was required to be filed. It is the obligation of the taxpayer to retain information to support the tax return that was filed with the Inland Revenue Department. The consequences of not maintaining adequate records may be significant. For example, in the event that you fail to keep records for the period required and the Inland Revenue Department has selected your return for an audit, you may be denied a deduction of all expenses you are unable to support.
ACCOUNTING SYSTEMS FOR TAX
Taxpayers are required by law to keep in the English language, proper books of accounts. There are many systems available that will be sufficient to meet the book of accounts standards required by the tax legislation, both computerized and manual. Selecting the appropriate accounting system is personal for each taxpayer and they should consider both tax requirements and business needs when deciding on the appropriate system. Whatever system a taxpayer selects for its bookkeeping and accounting purposes, that system must maintain an audit trail. That means that an independent person should be able to trace all items of information contained on the company’s financial statements and Tax Return from source to destination.
An appropriate accounting and record keeping system will allow the taxpayer or an independent person to identify all the individual transactions that comprise an amount reported in the financial statements or on the Income Tax Return. In addition, it will allow the taxpayer to locate all the supporting documents for any of those transactions, such as an invoice, voucher, cheque, purchase order, bank debit or credit, written agreement or some other document or combination of documents. The user will be able to determine where any particular individual transaction, such as a cheque, debit memo or invoice, has been reported in the financial statements or on the Income Tax Return. If an audit trail does not exist, it will be difficult for the taxpayer to support the financial statements and the Tax Return. This could result in deductions being disallowed or an assessment that is based on best judgments rather than based on the financial statements.