On the Record: Getting Your Clients’ Tax Data in Order

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Your office is probably geared up and ready for tax season. Your tax software is installed and ready to go. Your tax pros are up to speed on the latest tax developments. However, there’s one thing still missing — that all-important tax data that will allow you to prepare accurate, complete and timely tax returns for your clients.

You may have sent tax data organizers to your clients well in advance of tax season, but now is a good time for a quick brush up — for both you and your clients — on the tax records that will be needed to substantiate the amounts reported on the 2018 tax return.

Tax records fall into three basic categories:


The majority of taxpayers will receive an annual statement of wages from their employers on Form W-2. This statement shows gross wages and deductions from their pay for Social Security and Medicare taxes, as well as both pre-tax and after-tax voluntary deductions for items such as health insurance or union dues.

Self-employed taxpayers will not receive Form W-2. They should receive Form 1099-MISC for payments of $600 or more for services performed in the course of a client’s or customer’s trade or business. (Attorney’s fees paid in the course of a trade or business must be reported on Form 1099-MISC regardless of the amount.) Under current rules, self-employed and business clients who accept credit cards will receive reports of those transaction on Form 1099-K.

However, payments for services that are not connected with a client’s or customer’s trade or business or charged to a credit card are not required to be reported. Therefore, the onus is on the self-employed taxpayer to keep track of payments received, and a good recordkeeping system is key. Moreover, a slipshod recordkeeping system may lead the IRS to question the accuracy of the taxpayer’s reported income.

Your clients may also have income from investments that may be reported to them on a variety of forms. These may include brokerage statements, mutual fund statements, bank statements, Forms K-1 from partnerships or S corporations, and 1099 forms.

Personal Deductions and Credits

A taxpayer’s records should back up the purpose and amount of each expense for which a deduction or credit is claimed, and include proof that the payment was made.

Special substantiation requirements apply to some common deductions and credits. For example:

  • Alimony: Taxpayers who pay alimony should maintain a copy of the divorce decree, separate maintenance agreement or other documents that specify the basis for the payments. They should also have a record of the name, address and Social Security number of the ex-spouse to whom the payments were made. And, of course, they should have proof of the alimony payments. If the payments were made indirectly, the taxpayer’s records should show the source and application of the payments.

KEY POINT: Documenting the source of an alimony obligation will continue to be important in future years. Under a law change made by the Tax Cuts and Jobs Act of 2017, alimony payments will no longer be deductible by the payor spouse or includable in income by the payee spouse. However, the law change will not apply to alimony payable under divorce or separation agreements executed before Jan. 1, 2019, or to agreements modified on or after that date unless the modification specifies otherwise.

  • Charitable contributions: To back up deductions for charitable contributions, taxpayers will need cancelled checks or other proof of payment showing the donee’s name and the date and amount of the contribution. For contributions of $250 or more to a particular charity, a taxpayer must get a written acknowledgement from the charity; a cancelled check is not enough.

Contributions of property are also subject to special substantiation rules. In addition to proof of the donation (and an acknowledgement for gifts of $250 or more), the taxpayer must have documents showing a description of the property and the place the donation was made. Documentation should also include a description of the method used to determine the fair market value of the property, a signed copy of any appraisal reports and a copy of any agreement with the charitable organization regarding the use of the property. For property valued at more than $5,000 (more than $10,000 for non-publicly traded stock), a qualifying appraisal is required.

  • Child tax credit: Effective for tax years beginning after 2017, the Tax Cuts and Jobs Act provides that a taxpayer can claim a child tax credit only if the child’s Social Security number (SSN) is shown on the return.
  • Dependent care credit: To claim a dependent care credit, a taxpayer must provide the name, address and taxpayer identification number for any person or organization that is engaged to provide care for a child or dependent. Taxpayers can use Form W-10, Dependent Care Provider’s Identification and Certification, to obtain this information from the care provider. This information should be retained with the taxpayer’s tax records.
  • Mortgage interest: Taxpayers who pay interest on a home mortgage will generally receive a Form 1098, Mortgage Interest Statement, from their lender. However, some taxpayers with less conventional homes — a boat or RV that’s used as a first or second home, for example — will not receive these statements. They should be alerted to obtain a summary of their annual loan interest from their lenders if the information does not appear on their final statements for the year.

Business Expenses

Self-employed business owners must keep records to show the amount, date and business purpose of day-to-day business purchases and payments for services. Records must also establish proof of payment.

Do I Need to See Original Records?

In some cases, you may ask your clients for original records — W-2s, 1099s, brokerage statements and the like — rather than run the risk of errors by having them summarize the information. In other cases, you may rely on a client’s summary. As a general rule, a preparer won’t be subject to tax return preparer penalties if a return is based on information furnished by the client — even if that information turns out to be incorrect.

However, there are situations where you should dig a little deeper. For example, while you don’t have to examine a client’s books and records to verify a client’s information, the IRS says you must make reasonable inquiries if any information seems incorrect or incomplete. In cases where the tax law requires records to claim a deduction, you must get your client’s assurance that those records exist. In all cases, your files should show that you asked the right questions.

Editor’s note: For more on recordkeeping, read “Why Good Recordkeeping is Important” by Mike D’Avolio, CPA, JD.

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