Record Keeping for Income Tax
Record keeping for tax isn’t just to make your work easy but is actually a legal requirement. All the documents that support your items of income, deduction or credit that appears on your tax return is important. These documents are proof that you indeed purchased what you said you purchased and you indeed earned what you said you earned.
These records include
- Bank statements
- Credit card statements
- Canceled checks
- Payment proofs
- All invoices
- Financial statements
- Prior tax returns
- Any other form of documentation that shows proof of an item of income, credit shown on tax returns or deduction.
Receipts and Tax Records
The best thing for a tax payer is to keep everything. But during a tax audit, tax records and receipts are the first line defense. This will allow you to prove any kind of tax deduction for your business.
The Six Year Rule
From the due date of the tax return (Tax Year), you are expected to keep all the tax records and related documents for six years. In these six years, you have plenty of time to make any kinds of amends i.e. date correction, address, amount etc. you want to make to the tax return before the authorities audit them again.
When the period limitation comes to an end, you are no longer required to keep the tax records or any other related documentation.
Exceptions to the Six Year Rule
Some documentation you are required to keep for a longer time. These are exception to the six year rule. Here are the documents and how long you are required to keep them.
- Bad Debts and Worthless Securities: if you deducted these from your tax return, you ought to keep that documentation.
- Omitted Income: if the income is more than 25% of the gross income stated on the return, and you do not report it you should keep it.
- Employee Records. If you have employees, then you are required to keep employment tax records.
- Fraudulent Return/No return: Well, in case you are indeed thinking about not paying the tax return, then there is no time limit for any of the documents. Since the authorities may start to come after you any time, so you might as well keep all the records.
- Any kind of Record that are Connected to Property. Generally, you should hold on to the record related to any kind of the property till the period limitation as per the year that you disposed it off.
- Provided that where any proceeding is pending before any authority or court the taxpayer shall maintain the record till final decision of the proceedings. Reference ITO 2001 Section 174(3).
Records, Information Collection and Audit Rule
According to Income Tax Ordinance 2001 section 174, every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed. And The Commissioner may disallow 1[or reduce] a taxpayer‘s claim for a deduction if the taxpayer is unable, without reasonable 2[cause], to provide a receipt, or other record or evidence of the transaction or circumstances giving rise to the claim for the deduction.
These expenses may not require documentation, but you may have to present an explanation when asked about it:
- If it is spent on transportation and receipt is not available readily.
- Lodging or meal expense when you are traveling for business.
You can also take advice from your income tax consultants to make sure you have all relevant accounts receipts before submitting your returns.