What Documents Do You Need for an IRD Audit?

If the Inland Revenue Department selects your return for review or audit, you must be able to support the income, deductions, reliefs and tax credits reported in it.

Sri Lanka’s Inland Revenue Act requires taxpayers to maintain source documents such as invoices, purchase orders, delivery notes, bank statements, contracts, costing records and other documents connected with their transactions.

Documents to Prepare for an IRD Audit

Income and banking records

Prepare:

• sales invoices and receipts;
• customer contracts and agreements;
• bank statements for every business account;
• statements for any personal account used for business transactions;
• schedules reconciling bank deposits to reported income; and
• explanations and evidence for loans, capital introduced and other deposits that are not income.

For foreign-currency or service-export income, retain the invoices, customer agreements and bank evidence showing that the foreign currency was remitted to Sri Lanka. Where a special tax rate was claimed, keep evidence showing that all qualifying conditions were met.

Expenses and deductions

Prepare:

• supplier invoices and expense receipts;
• rent agreements and rental receipts;
• utility bills;
• professional-service invoices;
• evidence explaining the business purpose of each major expense;
• schedules separating personal and business expenditure; and
• calculations distinguishing capital expenditure from revenue expenditure.

Producing a receipt does not automatically make an expense deductible. The expense must satisfy the relevant conditions under the Inland Revenue Act.

Payroll records

Payroll documents may include:

• payroll registers;
• employment contracts;
• payslips;
• APIT calculations and payment records;
• annual APIT statements and T-10 certificates;
• EPF and ETF returns and payment receipts; and
• calculations supporting non-cash employment benefits such as vehicles or accommodation.

VAT, SSCL and withholding records

Prepare, where applicable:

• VAT returns and payment confirmations;
• tax invoices issued and received;
• input- and output-VAT reconciliations;
• historical SVAT records for periods before the scheme was abolished;
• SSCL returns and liable-turnover calculations;
• WHT and AIT certificates received or issued; and
• evidence of WHT, AIT and APIT payments made to the IRD.

Assets and financing

Prepare:

• the fixed-asset register;
• asset-purchase invoices;
• capital-allowance calculations;
• asset-disposal documents;
• lease and hire-purchase agreements;
• loan agreements; and
• schedules reconciling loan balances and interest expenses.

Entity and filing records

Depending on the taxpayer, these may include:

• Certificate of Incorporation or Business Registration certificate;
• Articles of Association;
• TIN and tax-registration certificates;
• financial statements;
• audit reports where legally required;
• copies of tax returns as filed;
• RAMIS submission acknowledgements;
• tax-payment receipts; and
• transfer-pricing documentation where the transfer-pricing rules apply.

Three Important Audit Rules

Entertainment expenses are not deductible

The Inland Revenue Act specifically denies deductions for entertainment expenditure. Keeping entertainment receipts does not convert the expenditure into an allowable business deduction.

The taxpayer must support a disputed assessment

Under section 141, a taxpayer objecting to an assessment bears the burden of showing that the assessment is incorrect.

This makes invoices, reconciliations, contracts and payment records important when requesting an administrative review. The burden relating to the imposition of a statutory penalty may be treated differently under the Act.

Large payments must use recognised methods

Where a person makes an aggregate payment of Rs. 500,000 or more:

• during one day;
• for one transaction; or
• through related transactions concerning the same event,

the payment should generally be made by an account-payee cheque, account-payee bank draft, card, electronic bank payment or direct deposit into the recipient’s bank account.

Where another method is used, the payment may not be deductible for income-tax purposes and may not be included in the tax cost of an asset. Statutory exceptions apply to certain government, banking and prescribed payments.

How Long Should Records Be Kept?

Income-tax records must generally be retained for:

• five years from the date on which the relevant transaction took place; or
• longer than five years where the assessment time limit has not expired or related proceedings have not been completed.

Documents proving the cost of land, shares, buildings and other assets should normally be retained for as long as the asset is held and through the relevant period after disposal.

Records connected with an assessment, administrative review, appeal or court proceeding should not be destroyed until the matter has been fully concluded.

What to Do If You Disagree With an Assessment

1. Request an administrative review

A request under section 139 must generally be submitted within 30 days of receiving the assessment or relevant decision.

The request should clearly state the disputed matters, grounds for objection, corrected calculations and supporting evidence.

2. Appeal to the Tax Appeals Commission

A taxpayer may generally file a petition with the Tax Appeals Commission:

• within 30 days of receiving the Commissioner-General’s administrative-review decision; or
• within 30 days after seven months have passed from the date of the administrative-review request, where no decision has been received.

The previous 90-day waiting period is no longer current.

Separate Tax Appeals Commission requirements may require either:

• a non-refundable payment equal to 10% of the disputed assessed amount; or
• a payment equal to 25% of that amount or an equivalent bank guarantee.

Professional advice should be obtained before filing because the documentary and procedural requirements are strict.

3. Appeal to the Court of Appeal

An appeal from the Tax Appeals Commission to the Court of Appeal must generally be made within one month of notification of the Commission’s decision.

The Court of Appeal stage is limited to a question of law.

Does an appeal stop tax collection?

No. Filing an administrative review or appeal does not automatically suspend the assessed tax.

The amount generally remains due and recoverable unless the Commissioner-General grants an extension of time under section 151.

Common IRD Audit Problems

Common issues include:

• missing invoices and receipts;
• unexplained bank deposits;
• personal and business funds being mixed;
• deductions with no documented business purpose;
• differences between tax returns and financial statements;
• unsupported foreign-currency tax treatment;
• missing WHT or AIT certificates;
• undervalued employee benefits;
• incomplete asset registers; and
• missing administrative-review or appeal deadlines.

How Finzdox Can Help With an IRD Audit

An effective audit response requires more than collecting receipts. The documents must be reconciled to the accounts, tax returns and bank transactions before they are submitted.

Finzdox Accounting assists businesses and individuals with:

• reviewing IRD audit and information requests;
• preparing a document checklist and response schedule;
• reconciling reported income to bank records;
• reviewing deductions and capital allowances;
• reconciling APIT, WHT, AIT, VAT and SSCL records;
• identifying unsupported or incorrectly classified transactions;
• preparing responses and supporting schedules for the IRD; and
• assisting with administrative-review documentation where an assessment is disputed.