MAINTENANCE OF ADEQUATE TAX RECORDS
What are good tax records?
For how long must these records be kept?
Should your tax returns ever be challenged, your primary protection against deficiency assessments and penalties (which are NOT tax deductible) are good underlying records, which will demonstrate that an accurate and complete tax return was filed. The responsibility to maintain these records is yours. Most tax records must be kept for as long as their contents are material in administering federal and state tax laws… records that support an item of income or deduction appearing on a tax return must be kept until the statute of limitations for the return expires.
The IRS usually requires three years from the date the tax return was due or filed, or two years from the date the tax was paid, whichever occurs first. In the special cases where the taxpayer has understated his gross income by more than 25%, the statute of limitations is extended to six years.
The California requirements are similar, although State law provides for a four-year period rather than three years. Adequate records could consist of paid receipts, canceled checks, sales receipts, escrow statements, etc.
In cases where original documents are not available, substitute records (including electronically preserved records), may be acceptable. One common example is the supporting evidence for business related travel and entertainment expenses. Because of the inherent difficulty in substantiating these expenditures, the government will usually accept a properly kept (i.e., contemporaneous) diary or travel log indicating destination, odometer readings and expenses incurred and paid.
Of SPECIAL note would be records to verify basis in real property owned – whether your personal residence or rental properties or any other real estate. These records should be kept indefinitely and take on special importance when real estate has been inherited. In those circumstances, documentation of the properties’ fair market value at the date of death is critically important, and may be found on an Estate Tax Return if one was required to be filed or by appraisal if no estate tax return was required.
ALSO of special note is the case of a net operating loss, even if that loss is carried forward over a period of years. Under such circumstances, it is fair for the IRS to require substantiation of the loss for a prior tax year, even if that year is no longer “open” under the statute of limitations. If you have any questions about these or other issues affecting your tax returns, we encourage you to discuss them with us.
PERSONAL INCOME TAX RETURNS
Dear Client: The purpose of this letter is to confirm the nature and extent of services to be provided by Mikhail Zadoyen Income Tax Inc., in connection with the preparation of your individual income tax returns.
Such returns will be prepared from information you furnish, and processed by computer. Tax returns may be filed electronically, unless we determine that “opting out” would be in your best interest, or if your tax returns do not otherwise qualify for e‐filing, or if you “opt out” of electronic filing.
We will not “audit” or otherwise verify the data you submit, although we may ask you for clarification or corroboration of certain data.
We will use our judgment in resolving questions where tax law is unclear, and in determining the reasonable support necessary for any tax position which may conflict with taxing authorities’ interpretations.
For a period of four years after filing, your returns are subject to examination by taxing authorities. In the event of such tax audit, we agree to represent you at our standard billing rates then in effect. You represent that you have adequate records and documentation to substantiate all items of income reported and expense deductions you furnish, and that you will retain such records for at least FOUR years after the filing date; this particularly includes data to support
- entertainment, travel and transportation expenses (including business auto mileage records);
- rental property income and expenses;
- interest expenses;
- charitable contributions.
We will correlate all data presented to us in the form and manner required by taxing agencies.
Partnership tax information will be reported as shown on forms K‐1.
Tax data relating to investments which are managed on your behalf by outside entities will be similarly reported ‐‐ i.e., based on information provided by those entities.
We do not accept responsibility for the accuracy of partnership information or other data with which we are not associated as tax preparers.
Furthermore, it is important to understand that the law imposes penalties for an understatement of tax liability. You have the ultimate responsibility for the information contained (or not contained) in your returns, and you should carefully review them before signing and filing them; any subsequent tax assessments, penalties and/or interest are solely your responsibility.
Please be aware that any person or entity subject to the jurisdiction of the United States (which includes individuals, corporations, partnerships, trusts and estates) that have a financial interest in, or signature or other authority over, bank accounts, securities, or other financial accounts having an aggregate value exceeding $10,000 in a foreign country, shall disclose such a relationship.
Although there are some limited exceptions, filing requirements also apply to taxpayers that have direct or indirect control over a foreign or domestic entity with foreign financial accounts, even if the taxpayer does not have foreign account(s). For example, a corporate‐owned foreign account would require filings by the corporation and by the individual corporate officers with signature authority. Failure to disclose the required information to the U.S. Department of the Treasury may result in substantial civil and/or criminal penalties. Such disclosure includes filing Form 8938 with this subject Form 1040. If you do not provide Mikhail Zadoyen Income Tax Inc. with information regarding any interest you may have in a foreign account, we will not be able to prepare any of the required Income Tax related forms, and penalties may be assessed, for which we will have no responsibility. In the absence of such information being provided, we will presume you do not have any foreign assets or financial interests and will not file any applicable disclosure forms without separate written authorization.
If you and/or your entity have a financial interest in any foreign accounts, you are also responsible for filing Form FinCen 114 required by the U.S. Department of the Treasury on or before April 15th of each tax year. U.S. citizens are required to report worldwide income on their U.S. income tax return. Penalties for failing to file the FinCen 114 or adequately disclose the foreign income START at $10,000 and can escalate exponentially.
In addition, currently the Internal Revenue Service, under IRC §6038 and §6046, requires information reporting if you are an officer, director or shareholder with respect to certain foreign corporations (Form 5471); foreign‐owned U.S. corporation or foreign corporation engaged in a U.S. trade or business (Form 5472); U.S. transferor of property to a foreign corporation (Form 926) ); and, for taxable years beginning after March 18, 2010, if you hold foreign financial assets with an aggregate value exceeding $50,000 (Form 8938).
Therefore, if you fall into one of the above categories, you may be required to file one of the above listed forms. Failure to timely file may result in substantial monetary penalties.
We assume no liability for penalties associated with the failure to file or untimely filing of any of these forms. You asking that you disclose all of your yearly income including barter, crypto‐ currency, consumer‐to‐consumer activity, cash‐based revenues and all other income whether received in‐person, in‐kind, or electronically.
With respect to professional fees, you agree to pay all fees timely in accordance with our standard billing policies.
ACA Requirement to Have Health Insurance
In March, 2010 President Obama signed the Affordable Care Act. One provision of the Act required that in 2015 all Americans must have qualified health insurance or face a “Shared Responsibility Payment” more commonly known as the Health Care Penalty.
In order to remind you of the rules and to protect us both from future IRS liability in the event of an audit, we require all individual taxpayers to positively affirm the following items related to Health Care.
Please let us know what you have:
- All copies of Forms 1095-A, 1095-B, and 1095-C received.
- Alternate government provided qualified health care insurance from Medicare, Medicaid, or Tri-Care that covers all members of our household.
- Qualified employer-provided health insurance for the entire year for your entire household.
- Qualified other health insurance you purchased directly from an agent or insurance company for the entire year which covers your entre household.
- In the event you do not have qualified health insurance for the entire year for your entire household, please provide us with the information regarding insurance coverage for all members of your household.
In the absence of the information regarding an exemption from the requirement to provide health insurance we will calculate the penalty and include it with your return.