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I, tax Preparer, occasionally describe the preparation of a tax
return as part art and part science. While there may be some artistic
elements to the preparation of a complete and accurate tax return, it
should not be an exercise in the purely creative arts. Good tax
preparation requires good information.
What is this "good information"?
Of course it includes all the W-2's, the various 1099 Forms for
income, the 1098 Forms for interest paid and the K-1 Forms. Most tax
preparers have on some occasion completed a tax return, and the return
has been filed, only to receive a phone call from the taxpayer,
informing the preparer that one of these forms arrived late and has
been omitted from the return. W-2's, 1099's and 1098's are required by
law to be sent to the taxpayer by January 31, but that does not mean
that you will receive them by January 31. They may have been mailed
late, and even if they are sent on time, the mail may be slow arriving.
Make sure you receive all of them before you file your return.
K-1 Forms are another issue entirely. They may be received at any
time during the year, since some entities keep records on a fiscal year
basis. They are distributed primarily by Partnerships, S-Corporations,
Limited Liability Companies and Estates and Trusts. Even with calendar
year entities, some K-1 Forms are not required to be mailed to you
until April 15. Be very sure that you have all your K-1's before your
return is completed. Usually correcting the omission of a form will
require an amended return.
Good Information for Itemized Deductions
I, tax preparer, do not expect my client to be aware of all the
latest laws on deductibility of various items. If he/she has the
slightest suspicion that an item may be deductible, bring the
documentation to his/her tax interview. Medical expenses, including
health insurance, the different forms of taxes and licenses, interest
expense, contributions, casualty or theft losses, work related
expenses, expenses for the production or collection of income, tax
preparation expenses and investment related expenses are all candidates
for deduction. Better to bring too much information than to miss a
deduction.
Good Information for Businesses and Rentals
There are various ways to submit good business ad rental
information. The "shoebox method" is highly discouraged. Throwing all
invoices, receipts and deposit slips, etc. into a shoebox, and dropping
that shoebox on my, tax preparer's desk during interview may seem like
an efficient way of keeping records, but it will result in high tax
preparation fees and often an inaccurate return.
Some of my clients submit QuickBooks files or other, simple
accounting system files. That is a good option. For small, part-time
businesses it may be sufficient to summarize your receipts and classify
your expenses in categories and provide the summary lists to the
office. Tax organizers provide an excellent guideline for the
summarization by categories, since they are usually designed to
parallel the categories on the tax return.
Filling in the results of your summaries on the organizer and
bringing the organizer to the interview is a very efficient way of
submitting data. If your business is one which could be subjected to a
hobby loss audit, it is extremely important to keep good records. One
of the
criteria for determining that your activity is, in fact, a business
rather than a hobby, is the quality of the accounting records. Good
records indicate a serious approach to the business, and will more
readily pass audit muster.
Some business deductions require logs or journals of expenses.
Entertainment expenses, and meals and away from home expenses as well
as auto expenses, are all examples of expenses which need to be
documented by a log or journal.
Investment Records
Be sure you keep complete records on stock transfers, investments,
etc. Looking for the 1099's and the records of individual Transaction
which are provided by the brokerage companies. These are necessary to
track gains and losses. Investment records for Partnerships,
S-Corporations, Limited Liability Companies and Real Estate will be
needed to track your basis in these activities.
This article is not an exhaustive list of the documentation needed,
but it does provide some good guidelines. The rule of the day is:
Better too much than too little documentation. I always tell my client
that CPA is not required to audit his/her records, but it is required
to make reasonable inquiry if information he/she furnish appears to be
incorrect or incomplete. These inquiries are not meant to annoy
him/her. They are meant to make sure that clients pay the correct
amount of tax and not a penny more.
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