WHAT RECORDS SHOULD YOU GIVE YOUR ACCOUNTANT?
For many people it's not obvious what records and information their accountant needs. The tax law is complex and there are literally hundreds of possible documents that may be needed by your accountant. This article will discuss the most important information your accountant must know when it's time to do your taxes.
Telepathy Doesn't Exist
Good communication between clients and accountants is essential in order to ensure that your taxes are done right. It is the duty of every client to inform their accountant of all material transactions and information that pertain to the client's tax situation. Similarly, it's impossible for your doctor, dentist, lawyer or any other professional to help you if you don't inform them of all relevant material facts.
Too Much Information May Slow Down Your Accountant and Create Errors
If you give your accountant irrelevant or unnecessary information you may slow him down. This can create costly and burdensome inefficiencies for both the client and the accountant.
Dumping useless, irrelevant and distracting information on your accountant can create a 'needle in a haystack' effect, where even the keenest accountant may not find the one crucial tax document buried deep inside the mountain of clutter you give him.
Clients should sort through their information using the lists and other guidance provided in this article in order to avoid exposing themselves to the 'needle in a haystack' situation.
Important Transactions Your Accountant Should Be Informed Of
Here is a list of major transactions your accountant needs to know about in order for him to do his job right (this list is not intended to cover every possible case):
(1) Starting, selling or buying a business including rental properties;
(2) Purchase or sale of business assets including vehicles;
(3) New business loans and refinancing of business loans;
(4) Bankruptcy, whether business or personal;
(5) Divorce, marriage or new dependents;
(6) Buying or selling your home;
(7) Casualty losses arising from fire, flood, storm, theft, etc;
(8) Business lawsuits;
(9) Inheritances and gifts;
(10) Moving - whether personal or business;
(11) Investment transactions including the sale of stocks, bonds, derivatives, land, or stumpage;
(12) Hiring employees;
(13) Did you retire this year? Were you an active-status member of the military?
(14) Did you go to college in Maine and then work for a Maine employer and also live in Maine? (Maine offers a special tax credit for this called the Opportunity Credit.)
Tax Records and Other Information to Give Your Accountant
Here is another key summary (not intended to cover everything) of tax forms and other records to give to your accountant:
(1) Form W-2 and W-2C for wage and salary income;
(2) Forms 1099-INT, 1099-DIV and 1099-B for investment income;
(3) Form W-2G reporting gambling winnings (also provide a summary of any gambling losses);
(4) Annual summary of any unemployment income;
(5) Form 1099-MISC for various other types of income;
(6) Alimony - whether paid or received;
(7) Form 1099-G reporting prior year state tax refunds;
(8) Any notice received from the IRS or state tax agency;
(9) Form 1099-K reporting revenues received via a credit card processing company;
(10) Form 1099-R reporting pension and annuity income;
(11) Schedule K-1's from partnerships, LLC's, S corporations, Trusts and estates;
(12) Pink and white annual statement of social security income;
(13) Any other Forms 1099, such as 1099-Q or 1099-QA;
(14) Tax reporting statements for Health Savings Accounts - contributions to the HSA are shown on Form 5498-SA and distributions from the HSA are shown on Form 1099-SA;
(15) Forms 1099-C reporting cancellation of debt income and Form 1099-A reporting the abandonment of a real property interest;
(16) Form 1098 reporting mortgage interest expense;
(17) Form 1098-E showing student loan interest and related form 1098-T showing tuition incurred for a tax year;
(18) Receipts or summaries of possibly tax-deductible expenses including charitable contributions, investment interest, property taxes, auto excise taxes levied on the value of the vehicle, out-of-pocket medical costs paid, qualified mortgage insurance premiums, job costs including travel incurred in connection with employment, moving expenses, and certain legal fees paid;
(19) A summary of any federal and state estimated tax payments made;
(20) Information on any foreign bank accounts;
(21) Form 1095-A reporting premiums paid to the federal health insurance exchange.
(22) IRS-issued Identity Protection Pin for the current tax year. Victims of tax return fraud are given this pin code.
(23) Are you (and your spouse if married) U.S. Citizens?
The Problem With Lists
A truly comprehensive list of what you should give your accountant might be very, very long. So here are some common sense tips to guide you in addition to the specific information provided above:
(1) Most tax forms have an "OMB" number. One way to distinguish an important tax form from mere statements or unhelpful records is to see if it has an official number assigned by the federal Office of Management and Budget. If it does it's likely your accountant will need it.
(2) For deductible business expenses see IRS Publication 535, available for free at IRS.gov.
(3) For deductible personal expenses, including itemized deductions, see IRS Publication 529.
(4) Pursuant to Internal Revenue Code Section 61(a) ALL sources of income are taxable, everything, unless a specific rule or law exempts it from tax. IRS Publication 525 provides a lengthy list of many types of tax-free income.
(5) When in doubt, shout! If you are unsure of whether a transaction or document should be given to your accountant, just ask.
What Happens If You Don't Give Key Information to Your Accountant?
The IRS receives information on your taxes from many sources including banks and other financial institutions. If an item of income is reported to the IRS and you don't inform your accountant of it then the IRS may issue you a discrepancy notice. In this case you are likely to owe back taxes, interest and penalties. Missing information may also increase the risk of an IRS audit.
If you neglect to inform your accountant of expenses or transactions that qualify for a tax credit then you may end up overpaying your taxes. However this type of error can be corrected by filing amended tax returns. In general you can correct the prior three years of tax returns before the statute of limitations runs out.
For various reasons some clients will want to go all the way to make sure their taxes are prepared to the highest degree of precision. The heuristic "rules of thumb" and lists provided above may be insufficient in this case. And so I am providing a full-blown 66 page Client Organizer for 2016.
Here it is:
Certified Public Accountant Master of Business Administration
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