Spring is upon us. The birds are singing, bees are buzzing, and the pollen count is off the charts. Even if you are experiencing snow in April (which is so weird), spring fever is still contagious. But business owners and accounting departments should not get carried away clearing out old files and records, in case the state taxing authority decides to visit.
In Texas, a sales tax audit can cover four years of transactions. So, a sales tax audit generated in 2018 can cover periods in 2014. That means, you would need your 2014 records now. Keep that in mind, when you get the urge to call you local paper shredding company. Nationally, the typical statute of limitations for sales tax is three to four years, if there is no fraud and you have been filing sales tax returns. You would have to retain your accounting records at least that long in case you are audited. (Please note that each taxing jurisdiction is different, so check the applicable statute of limitations in your state.)
Unfortunately, some companies don't retain records long enough. While the taxing authority may understand that the someone decided to clean out the file cabinets or that there was a computer system conversion and the records were lost, it doesn’t change the fact that the company is being audited. Whatever the reason, a lack of records will never forestall an audit.
The taxing authority has various options to address this issue. The most dreaded option is to estimate your sales tax deficiency. Estimates are rarely a good thing for the business owner. The most problematic issue with estimates is that if you are unhappy with the outcome, the lack of records, makes it more difficult to prove that the estimate is unfair.
If you have the itch to get rid of the paper in your offices, think of ways to do so without destroying your records. Scanning your files and retaining electronic copies will clear your warehouse and help you retain your records in case you are ever audited. Uploading files to the cloud or retaining backup copies of your records that can be easily retained are other options.
Records are a good thing when the taxman comes knocking on your door. Keep that in mind when the urge to clean hits the accounting department.