Cor­rect­ing or canceling an invoice

Only the service provider, company or merchant who issued the invoice may provide cor­rec­tions or can­cel­la­tions to an invoice. A cor­rec­tion by the recipient of goods or services is not permitted and will not be accepted by the tax office.

In the case of a tax audit, or special sales tax audit, invoices and receipts are the focus of the in­ves­ti­ga­tion. Con­sid­er­ing how many invoices and receipts a business can ac­cu­mu­late, it is a great achieve­ment for a company to do this with no errors. The reality is that companies often do make mistakes: as a rule, there are some small and oc­ca­sion­al­ly some large errors. The IRS or other in­ves­ti­gat­ing authority may ask you enter your tax de­duc­tions from the beginning as a result.

A statute called the Ad­min­is­tra­tive Remedies for False Claims (31 USC Chapter 38. §§ 3801 - 3812) covers sit­u­a­tions where a claim has been made in error. This statute allows for ad­min­is­tra­tive re­cov­er­ies by federal agencies. If a person submits a claim that the person knows is false or contains false in­for­ma­tion, or omits material in­for­ma­tion, then the agency receiving the claim may impose a penalty of up to $5,000 for each claim. The agency may also recover twice the amount of the claim.

Has a customer of yours returned goods to you? Have you noticed an incorrect amount in your invoice, or forgotten to include any other crucial in­for­ma­tion in it? All you need to do to rectify the situation is write a corrected invoice to your customer! To do this, you need to know what in­for­ma­tion is crucial when making an invoice.

There is no national legal standard in the USA that states what contents an invoice issued within the US to another customer within the US must include. However, ac­count­ing best practice standards dictate that the following in­for­ma­tion should be present on any invoice issued by a merchant:

✓    The full name and address of both the merchant and the customer.

✓    The business Employer Iden­ti­fi­ca­tion Number (EIN), or if you run a sole pro­pri­etor­ship or LLC, your own Social Security Number.

✓    The customer’s Social Security Number (if provided).

✓    The issue date of the invoice.

✓    The amount due to be paid.

✓    The deadline date for paying the amount due.

✓    The correct invoice number for the invoice.

✓    Accurate de­scrip­tion of goods or services provided.

✓    You may be required to include sales tax in your invoice, depending on your state sales tax reg­u­la­tions.

✓    Any pre-arranged discounts ap­plic­a­ble.

If one of these details is missing or incorrect, you should issue an invoice cor­rec­tion. If not, you run the risk of having in­ad­e­quate records when it comes to filing tax returns and may risk not being able to claim back on your sales tax expenses.

There are two things you need to remember when dealing with an invoice cor­rec­tion. Firstly, you must issue the missing or correct in­for­ma­tion by means of a corrected invoice with a new invoice number. Secondly, your corrected invoice must clearly refer to the previous invoice it is replacing. Do not worry too much about spelling mistakes or typos – generally, if the meaning of your bill is clear, you do not need to make any cor­rec­tions.

If the incorrect invoice has not yet been dis­patched to the customer or processed by your ac­count­ing de­part­ment, then there is no need to create a cor­rec­tion invoice. All you need to do is start the first invoice again from scratch under the same invoice number and send it to the customer. After all, they have not yet seen the mistake so they need never know it was made in the first place.

However, if the customer has already received the bill, you should issue the corrected one as quickly as possible. It is also best practice to inform the customer that you are issuing them a cor­rec­tion invoice. If the bill has not yet been paid and has not been debited, then you can use a billing cor­rec­tion to correct your mistake. This is a document that corrects the missing or incorrect in­for­ma­tion and is sent to the customer before they have paid the bill. When issuing a billing cor­rec­tion, you must make sure that the document clearly cor­re­lates to the pre­vi­ous­ly issued invoice. To do this, be sure to include the following in­for­ma­tion:

✓     Name and Address of the company providing the service

✓     Cor­rec­tion of the previous error

✓     Reference to the invoice number and date of origin.

Hand­writ­ten cor­rec­tions are also an option in some sit­u­a­tions. If your customer comes back to your business with the incorrect invoice, you can correct the error by hand with a note directly on the original invoice. However, you must be sure to sign, date and stamp (if you have a company stamp) the invoice. You will need to make a copy of this corrected invoice for your own records and store it together with the original invoice.

If the invoice has already been sent, a revised document is no longer suf­fi­cient. You will need to proceed in two steps: firstly, you will need to cancel the old invoice and issue a new one. You can cancel the original invoice by creating a can­cel­la­tion invoice with a negative invoice amount. This means that the original invoice is no longer valid and is canceled when the reversal invoice is posted. Make sure that the can­cel­la­tion invoice has its own invoice number. Include the following in­for­ma­tion to ensure that it is assigned to the original invoice: ✓     The original invoice number ✓     The date of the original invoice Secondly, you will need to create a new proper invoice, with a new invoice number. Be sure to include the original invoice number in the subject line. This will make it easier for the IRS to un­der­stand the entire process.

Click here for important legal dis­claimers.