J. William Seabrooke CPA P.C.

The exclusive purpose for the information which is provided from this website is to disseminate  information, and not to provide tax advice.

Perhaps two of the most stressful situations in life are 1) preparing a tax return, and 2) going through a tax return audit.  You are solely responsible for your tax returns, even if someone else prepared it, and you must always be prepared to justify the amounts that you reported.  CPAs and tax preparers have an important rule which we follow – “No receipts or documentation – no deduction!”

There are several strategies that  are available to you which can easily “level the playing field” and diminish the stress levels which you may have experienced every year in the past:

•  Keep all supporting receipts and documentation – these can be either in paper or electronic format.  Group these records by tax return category, i.e. income, interest, dividends, education expenses, medical expenses, taxes, mortgage loan interest, charitable deductions, miscellaneous deductions, etc.
• Use software applications- Microsoft Excel and Intuit’s Quicken are both excellent.  There are also others that are available which you may prefer.   Acrobat Reader, which is free, provides an application to save and store the files on your hard disk drive.  Be sure that your files are continuously backed up.
• Maintain your own data base – if you have decided to engage one, your tax preparer should always provide you with a complete, detailed version of your tax returns, including supporting schedules, statements, and notes.  Don’t rely on your tax preparer to maintain a data base for you.  He or she will not always be available, or you may change tax preparers, move, etc.
• Ensure that your tax return files are always current, accurate, and complete – for example, you purchased a home in 1990.  You should begin creating your data base starting with all of the  closing documents, including the HUD-1 (Housing and Urban Development).  In 2004 you added a swimming pool, sun deck and an additional bedroom.  You now need to update your files and records to include all of these costs with the associated documentation.
• Know the rules for record retention –  generally, you should keep all of the necessary files which ae required to support your tax return for three (four for a small business owner) years after the due date for the tax return, plus any tax return filing extension periods.  For example, your 2010 tax return was initially due on April 18, 2011.   Normally, you would be required to retain all of your tax return records until April 18, 2014.  However, since you requested an automatic six-month extension of your time to file your 2010 tax return, you will be required to retain your tax return files and records until October 17, 2014 (2015 if you are a small business owner).  There is another important rule to remember.  There is no statute of limitations for a review or audit of your tax return if you understated or misstated your income!
• Capital assets and investments – the three-year rule does not apply for these tax items.  You’ll need to continue to keep the tax records and documents for your personal residence or second home as long as you own the assets.   The original purchase documents and records for stocks, bonds, mutual funds, etc follow the same record retention rules.  Special rules apply for both inherited assets and investments.  Consult with the trustee, executor, or your tax preparer.
• Supporting statements and documentation -  tax auditors and tax return preparers are not clairvoyant.  They did not accompany you on your business trip to Los Angeles in October 2010.  Obtain and retain the required documentation and statements for your hotel bills, meals, travel, transportation, etc.   Whenever it is appropriate, I always encourage my tax clients to prepare a letter or memorandum for their tax records regarding the facts and circumstances for reported income or a claimed deduction that should also  include the facts and explains the rationale which was used by the taxpayer.  You should always cite the appropriate page and section of the applicable tax return instruction, and if available, the tax code.  These documents will become invaluable to you and your tax preparer or tax attorney during a tax return audit (or review)!
• Use the Internet – almost everyone in America has access to and uses the Internet.  Identify a favorite website for tax law news information, i.e. http://money.cnn.com   or use your favorite search engine (Google, Bing, Yahoo) to obtain your preliminary information.  Then go to THE authoritative sources – http://irs.gov and your state department of revenue websites.  Each year, usually in December or January, the IRS issues Publication 553, “Highlights of XXXX Tax Changes” which summarizes the key changes in the tax laws for that year.  It is also available in HTML format, i.e. http://www.irs.gov/newsroom/article/0,,id=120227,00.html  (more…)