The Hidden Costs of Poor Tax Records and How to Avoid Them

Disorganised tax records can have serious financial implications, but many of these costs are hidden.

The penalty for unorganised tax records might not appear as a line item on the balance sheet but accumulates throughout the year nevertheless. Poor record-keeping can create a chain of consequences that extend far beyond simple frustration. These can include:

1. Poor tax records can lead to lost deductions and credits

The most significant hidden cost of unorganised tax records is the loss of possible deductions and credits. Deductions and credits rely on supporting documentation, including:

• receipts
• invoices
• logbooks 
• proof of payments
• relevant certificates

When tax records are muddled and disorderly, many taxpayers avoid claiming everything they’re entitled to. They want to sidestep the hassle of gathering the necessary information to pass a SARS audit. Common examples of deductions and credits lost include the following:

Keep a tax record to claim medical expenses

To claim medical expenses under Section 6 of the The Income Tax Act (ITA), the taxpayer must be able to show that the expense was paid by them and not recoverable from the medical aid. Taxpayers have to provide proof of payment and the relevant invoice, as well as a detailed statement from their medical aid to confirm the amount was not recovered by the medical aid.

Charitable donations require tax records

Charitable donations made to approved Public Benefit Organisations (PBOs) can be claimed under Section 18A of the ITA. The taxpayer must obtain a valid Section 18A receipt from the approved PBO which should include specific information, like the donor’s: 

• name
• address
• ID number 
• tax reference number

The receipt should also include the PBO’s details and unique Section 18A reference number. Finally, the date and amount of the donation has to be included. Without the proper receipt, the taxpayer’s act of kindness will have no tax benefit.

Tax records and Input Tax expenses

Taxpayers can deduct the Value Added Tax (VAT) included in business expenses incurred in the course of making taxable supplies. However, without a proper tax invoice, a taxpayer won’t be able to deduct the input tax on business expenses. The tax invoice must include the recipient’s and supplier’s:

• name
• address 
• VAT registration number
  

The invoice should also contain: 

• a serial number
• date of issue
• quantity of goods supplied
• the value of the supply 
  

If the incorrect or incomplete information is provided, SARS may disallow the input tax during audits.

2. Poor tax records incur higher professional fees

Tax professionals and accountants work most efficiently when records are organised and complete. When documents arrive scattered or dispersed, the time spent sorting, reconciling, and clarifying the information inevitably increases professional fees. Clients with unorganised tax records often pay more because of the complexity of the cleanup work, even if their tax situation is fairly straightforward.

Inconsistencies stemming from poor record management tend to raise red flags with SARS. This could negatively affect taxpayers due to increased scrutiny in future filings. It also increases the risk of audits. This will result in extra time spent by tax professionals and accountants in gathering the requested information and preparing proper and complete responses to SARS.

Disputes for amounts to be corrected or penalties to be waived also incur further professional fees.

3. Poor tax records result in missed deadlines and penalties

When tax records are unorganised, filing or payment deadlines can be missed. Missed deadlines incur penalties and interest, which can quickly add up to a hefty sum. In certain circumstances, disallowed deductions can also lead to understatement penalties.

By law, taxpayers are required to keep tax documents and their supporting records for a minimum period of five years from the date of submission of the tax return. The taxpayer’s responsibility therefore doesn’t end once a return has been submitted.  SARS may request supporting documents years later. Trying to reconstruct five years of financial history and reasoning becomes extremely time-consuming and often impossible.

Proper accounting systems with accurate and complete capturing might be well worth the upfront costs to prevent these penalties. Organised tax records are a strategic asset. Consistent filing, digital backups and clear categories can help individuals and companies avoid paying far more later.

Frequently asked questions