Question

Your self-employed tax return client tells you that she estimates her total out-of-pocket supplies expense for the year as “around $6,000.” She can’t be more precise, however, because her records were destroyed in a fire. Based on having prepared her tax returns for prior years, you believe that $6,000 is a reasonable guess and are prepared to enter that amount on her Schedule C.

But then the client throws a curve ball at you. “Don’t enter it as exactly $6,000,” she says. “Put it in as some odd amount, maybe “$6046.14” – that way it will look more like a real amount and not just a guess. Don’t want to give the IRS a reason to audit me!”

Based on SSTS No. 4, how should you handle this unusual request?

Answer 1

According to Statement on Stanadards for Tax Services No.4 (SSTS No.4), A member may us ethe tax payers estimates for preparing the tax return unless it is prohibited by the law. If it is not possible for the member to get the exact numbers, he can determine the estimates based on the facts and circumstances known to him.

When the records are missing and the exact informatin is not available at the time of return, the member can prepeare a tax return based on the estimates of the missing data.

Specific disclosure for the estimated values inthe return is generally not required. However, disclosure is required if there are unusual circumstances that would mislead the tax authorities regarding the accuracy on the tax return. Some of such unusual circumstances are as follows:

1) If the relevant records are destroyed through fire, computer failure, natural disaster

2) If the tax payer is ill or died at the time of income tax file return

3) If there is an litigation pending that bears on the return

4) If the tax payer does not receive schedule k-1 for a pass at the time income tax file return.

In the given case, the records are destroyed and are unable to find the accurate for income tax file return, but based on the circumstances they are able to determine the estimates as $6,000. So, I explain the client as mentioned above that we need not mention the exact values when the records destroyed by fire an will enter the amount as $6,000 only. I als need to disclose about the estimates in the income tax file return as the records are destroyed by fire.