“Errors in tax filings can result in notices, refund delays, interest charges or penalties. Minor differences between accounting books and tax documents can create compliance problems if left unchecked. The process of tax reconciliation allows businesses to reconcile their accounting records with their tax information, identify any discrepancy and make corrections before the tax return is filed. It will also help the business achieve greater accuracy in financial statements and avoid disputes.
Why Tax Reconciliation Is Important
The business keeps several records for accounting purposes, billing, payment of taxes, statutory requirements and others. These records do not always tally because of mistakes in data entry, delays in reporting, errors in classification of tax or transactions that are done at different time periods.
For instance, an entry in the books of accounts might not be found in the information provided by the vendor. Again, tax deduction at source in a transaction might not tally with the tax statement for the period.
This process of reconciliation helps in identifying these differences before filing date arrives. Businesses can benefit from professional tax compliance services in this regard.
Common Tax Mismatches to Watch For
Before preparing for their return, companies should look into the following:
- GST mismatches: Differences between sales recorded in the books and GST returns, or discrepancies in eligible input tax credit and supplier invoice details.
- TDS mismatches: Differences between tax deducted or collected as recorded in the books and the details available in Form 26AS or AIS, as applicable.
- Income mismatches: Differences between income recorded in the books and income reflected in tax statements, bank records or other supporting documents.
- Tax payment and challan discrepancies: Incorrect details in tax payment records or challans that may affect the crediting of tax payments.
- Timing differences: Differences arising when transactions are recorded in different accounting or reporting periods.
Steps to Identify and Fix Mismatches
With a proper reconciliation process, it will be much easier to conduct investigations and make all the corrections before submitting the report.
Gather All Necessary Documents
Compile the general ledger, sales and purchase register, invoices, bank statement, GST return, TDS statement, challan and other required documents for the purpose of comparison. All the documents should pertain to same reporting period.
Compare Figures
Compare accounting documents with tax documents. Spreadsheets and accounting software will be useful in determining any missing invoices, duplicates, incorrect sums, and discrepancies in tax calculation.
Determine the Reason
It is better not to make any corrections without knowing the reason. You should understand why there is such discrepancy and whether it is a simple error in timing or reporting.
Make Corrections Where Necessary
Make corrections where necessary. If a supplier’s invoice is missing from the relevant GST records, contact the supplier to resolve the discrepancy and determine whether any correction or follow-up is required.
Maintain Supporting Documents
Collect all the reconciliation statements, invoices, letters, payment proofs, and other available information regarding the corrections made.
How to Establish an Effective Pre-Filing Process
The process of tax reconciliation needs to be done regularly and not just as an afterthought. This is because with monthly checks, defined roles, and automation, companies can identify mistakes in a timely manner and minimize duplication of efforts.
Professionals in tax compliance can also help the organization to check the complicated transactions and find out what exactly should be reported.
In this way, the company will be able to minimize mistakes in its filings and keep good track of its records.
FAQs
Q: What is tax reconciliation?
Tax reconciliation compares accounting records with tax documents to identify and correct differences before filing a return.
Q: Why is tax reconciliation important before filing?
It helps reduce filing errors, delayed refunds, interest, penalties and disputes caused by inconsistent financial or tax records.
Q: What is a GST mismatch?
GST mismatches can involve differences in reported sales or eligible input tax credit compared with supplier invoice information.
Q: What are timing differences in tax reconciliation?
Timing differences occur when the same transaction is recorded in separate accounting or reporting periods across different records.
Q: What should be done before correcting a tax mismatch?
Businesses should determine whether a mismatch results from timing, data entry, classification or reporting before correcting it.
