Monday February 10, 2014
Dear Clients and Friends,
Normally, you would not be responsible for fortuitous events such as flood, fire, earthquake or other calamities which you have no control over or what they call "acts of God." However, this is not the case when it comes to your taxes and tax records. When you lose them due to fire or flood, IRS does not sympathize and let you off the hook that easy. You will still be required to do some filing and this could be more time consuming and financially draining that you could have imagined.
[caption id="attachment_130" align="aligncenter" width="300"] Your Important Tax Records[/caption]
What IRS Says About Your Situation
The IRS rules according to 26 CFR Section 1.274-5t(c)(5)
(5) Loss of records due to circumstances beyond control of the taxpayer. Where the taxpayer establishes that the failure to produce adequate records is due to the loss of such records through circumstances beyond the taxpayer's control, such as destruction by fire, flood, earthquake, or other casualty, the taxpayer shall have a right to substantiate a deduction by reasonable reconstruction of his expenditures or use.
What You Have to Do
In short, you will have to file your returns based on reasonable reconstruction and this could mean spending days hours trying to come up with all the figures for your tax deductions. If you lost a one year record, then you might need to call in several people to give you copies of invoices and other documents. What if you lost five years of tax records? Do you remember them all? Will they be willing to testify as proof of your tax deduction claims? Do you have all the time and people to gather corroborating evidence?
What You Have to Pay
In the end, your reasonable reconstruction is normally not a 100% acceptable figure for IRS. You may still end up paying some taxes, which you could have avoided if your records were not lost. On top of that, if the courts find that you are at fault for lack of tax records to substantiate your tax deductions, you may also pay additional penalties aside from taxes and interest.
What You Should Be Doing
Your tax records, especially your proof of evidence for tax deductions, are always worth safekeeping and protecting. Lost tax records means unnecessarily losing time and money. Here are a few things you can do today to avoid the unnecessary dilemma:
1) Invest on fireproof and waterproof cabinets.
2) Invest in paperless environment including larger computer memory, scanners, online or cloud accounting systems.
3) Outsource your bookkeeping.
We can help you make sure your tax records are well protected or provide professional service to reasonably reconstruct your tax deductions.