Our responsibility

[Questionguy101]

I have always heard my fellow tax professionals say..."We are not auditors and we are not responsible for inspecting receipts or tax records".

Do you agree or disagree?

Take gambling loss as an example. The IRS says taxpayers need gambling loss record to claim the deduction. If a client tells you that he did lose over $10,000 last year but he did not have a gambling loss record. He still wants to claim the gambling loss though. What would you do?

[S T]

Receipts or Records

On the Gambling as well as other issues, I ask for a record or receipts - My name is on the return!

Sandy

[erchess]

Seeing vs Believing

As far as I understand the rules, we are supposed to actually see three categories of records for a 1040 taxpayer: 1, the standard information documents such as Forms W2, bank interest statements, and Forms 1099; 2 receipts for charitable contributions and in the case of large sums being claimed for noncash contributions, the required additional documentation; and 3 mileage records.

My understanding would be that we can rely on oral or written client statements for other things. But that doesn't answer your question because you posited a client who told us he does not have required records but still wants the deduction. If possible I would help the client obtain the documentation from the casino. If that is not possible and I cannot convince the client to follow the law I must withdraw from preparing the return. The client will then go tell someone else that he does have the records and that person will be within his or her rights to believe the client. The fly in the ointment would be that when the IRS came calling the client would say that he told the preparer he had no records.

[Questionguy101]

As far as I understand the rules, we are supposed to actually see three categories of records for a 1040 taxpayer: 1, the standard information documents such as Forms W2, bank interest statements, and Forms 1099; 2 receipts for charitable contributions and in the case of large sums being claimed for noncash contributions, the required additional documentation; and 3 mileage records.

Mileage records...what if the client tells you he has it at home. Or that he does not have one but he will use his memory to compile one in good faith. Would you still demand to see it before you finalize his tax return?

[erchess]

Yes

Not only will I have to see it I will have to retain copies of a few randomly chosen pages. A reconstructed log might fly at audit but I would warn the client that it might be shot down for not being contemporaneous.

[Questionguy101]

As far as I understand the rules, we are supposed to actually see three categories of records for a 1040 taxpayer: 1, the standard information documents such as Forms W2, bank interest statements, and Forms 1099; 2 receipts for charitable contributions and in the case of large sums being claimed for noncash contributions, the required additional documentation; and 3 mileage records.

My understanding would be that we can rely on oral or written client statements for other things. But that doesn't answer your question because you posited a client who told us he does not have required records but still wants the deduction. If possible I would help the client obtain the documentation from the casino. If that is not possible and I cannot convince the client to follow the law I must withdraw from preparing the return. The client will then go tell someone else that he does have the records and that person will be within his or her rights to believe the client. The fly in the ointment would be that when the IRS came calling the client would say that he told the preparer he had no records.

What kind of documentation can you get from the casino? The casinos often can only give a "coins in" and "coins out" statement to the customers. But how can it be used to satisfy the "daily gambling win/loss record" requirement by the IRS?

[taxea]

I have always heard my fellow tax professionals say..."We are not auditors and we are not responsible for inspecting receipts or tax records".

Do you agree or disagree?

Take gambling loss as an example. The IRS says taxpayers need gambling loss record to claim the deduction. If a client tells you that he did lose over $10,000 last year but he did not have a gambling loss record. He still wants to claim the gambling loss though. What would you do?

For gambling loss I ask for a win/loss statement or his documentation. If he has nothing, I explain the consequences; if he persists my standard is "I can't do your return because I am not willing to jepardize my license for you" and send him on his way. I don't think any of us need clients so badly that we would be willing to cheat for them.

[Gary2]

I'm not sure why people are asserting there's a hard requirement to see anything that you're not required to either keep for electronic filing (e.g. W-2s) or send with the 8453 (e.g. Form 8332).

The IRS EITC web site, which I'd expect to have the strongest due diligence perspective, doesn't say this, and even goes as far as saying you can help reconstruct expenses. Note that that page doesn't say you have to see the income log; you have to ask the client to describe their records. On the expense side, it says "You can guide her through the reconstruction process or simply offer tips and ask her to return when she is complete." The implication, in the latter case, is that she might return with some sort of handwritten summary of her results; it doesn't say she needs to bring back all her calculations. If it's allowed in that case, where you know that the receipts don't exist, why would you need to see anything more from a client who asserts that they do have receipts to back up their QuickBooks printout?

Perhaps Schedule C, particularly in the presence of EITC, is a special case where the catch-22 requires you to work with less than perfect records. The taxpayer is required to claim all expenses. If they don't have a mileage log at all, they're still required to claim the mileage. Note that Form 4562, under listed property, asks if there are records and if they're written, but doesn't say to stop if you answer "no." The IRS may disallow it (and if they choose to look at it at all, they almost certainly will unless there are special circumstances), but that doesn't mean you can't or shouldn't report it. (If there's a risk of penalties for substantial underpayment, I'd research further.)

[Gary2]

Not only will I have to see it I will have to retain copies of a few randomly chosen pages. A reconstructed log might fly at audit but I would warn the client that it might be shot down for not being contemporaneous.

I've heard of cases where a state revenue department has asked for pages that they've chosen at random, e.g. a request that specifically asks for records for March, August, and October. So unless you're extraordinarily lucky, your random copies may not help.

If you wish to provide a record keeping service for your clients, so be it - there may be a good profit in it. If you're just trying to get a head start in case of audit, then only you can decide whether the effort is worth the risk. If you're just trying to CYA, then I guess that's between you and your insurance company. If your practice has a pattern of claiming unsubstantiated deductions, then I could imagine the IRS would hold it against you, but I've never seen anything that suggests the IRS requires the preparer to provide documentation on behalf of all clients or even prove that they've inspected all such records.

[oceanlovin'ea]

I am more proactive in telling clients requirements for taking mileage. I tell them they must have a log. If they don't have one, I give them a calendar and tell them to go home and reconstruct their mileage based on places they went, etc. I tell them that it asks the question on the tax return "do you have records for your mileage" and Is it written?" I tell them that if they don't have written records the deduction will most likely be denied.

But if they give me a paper with mileage written on it, I don't ask to see their documentation.

Other times I make sure they have their receipts. Some bring them to me, but still have everything added up for me. I will question unusual items they have listed.

I am careful to let them know they will need the receipts if they are ever audited. But I don't need to see them.

Linda, EA