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Internal Revenue Code Section 6001 requires Taxpayers to maintain adequate books and records and “that that every person liable for any tax imposed by the Code, or for the collection thereof, must keep such records, render such statements, make such returns, and comply with such rules and regulations”. Adequate Books and Records or Well-Organized Records make it easier to prepare a tax return and help provide answers if a taxpayer’s return is selected for examination or if a Taxpayer receives an IRS notice. Taxpayers ought to keep records and supporting documents, such as receipts, canceled checks, and other documents that support an item of income, a deduction, or a credit appearing on a return as long as they may become material in the administration of any provision of the Internal Revenue Code, which generally will be until the period of limitations expires for that return.  Of note, adequate books and records are critical as  business records must be available at all times for inspection by the IRS. If the IRS examines a taxpayer’s tax returns, they may be asked to explain the items reported. A complete set of records will speed up the examination.  Finally, keep this in mind, the IRS can reconstruct a taxpayer’s income if there are no adequate books and records.  The IRS can also apply a 20% accuracy related penalty under Internal Revenue Code Section 6662 for negligence or disregard of rules or regulations as   failure to maintain adequate books and records or provide substantiation of items reported on a tax return constitutes negligence for the IRS.

Adequate Books and records will assist a taxpayer in:

  • monitoring the progress of their business
  • preparing financial statements
  • identifying sources of income
  • keeping track of deductible expenses
  • keeping track of their basis in property
  • preparing tax returns
  • supporting items reported on tax returns
  • minimizing the risk of a deduction disallowance
  • assisting in the event of an audit
  • avoiding the IRS from “reconstructing” a taxpayer’s income

Understanding the Burden of Proof

The IRS states that the responsibility to prove entries, deductions, and statements made on a tax return is known as the burden of proof.  Taxpayers must be able to prove (substantiate) certain elements of expenses to deduct them via documentary evidence. Generally, taxpayers meet their burden of proof by having the information and receipts (where needed) for the expenses. Taxpayers  should keep adequate records to prove their expenses or have sufficient evidence that will support their own statement.

Don’t Forget about Digital Assets!

Taxpayers that invest in digital assets that are:

  • Selling
  • Trading
  • Exchanging
  • Converting digital assets into fiat currency
  • Using digital assets to obtain goods and services and
  • Getting wages and or salaries paid in digital assets

Ought to be sure that they are keeping adequate digital assets books and records.

The Internal Revenue Code imposes many different kinds of penalties, ranging from civil fines to imprisonment for criminal tax evasion  

The IRS states that: “If you do not file your return and pay your tax by the due date, you may have to pay a penalty. You may also have to pay a penalty if you substantially understate your tax, understate a reportable transaction, file an erroneous claim for refund or credit, or file a frivolous tax submission. If you provide fraudulent information on your return, you may have to pay a civil fraud penalty.  Penalties are generally payable upon notice and demand. Penalties are generally assessed, collected, and paid in the same manner as taxes. The notice will contain the name of the penalty, the applicable code section, and how the penalty was computed (or information on how to obtain the computation if not included)”.

Tax Experts are essential in Risk Prevention

There are Taxpayers that understate income, overstate expenses and present fraudulent claims on their tax returns for credits and deductions. These Taxpayers run the risk of being identified by the IRS and having IRS determine the Taxpayer’s taxable income (taxpayer under-reported income) and potentially be exposed to a 20% penalty.  Taxpayers have a responsibility for substantiating entries, deductions, and statements made on their tax returns. Taxpayers meet their “Burden of Proof” by having the supporting information and receipts for the deducted expenses and by keeping adequate books and records.

Who is your Tax Expert?  ©