Schedule C and Record Reconstruction Training
1. Make additional reasonable inquiries regarding the taxpayer's business to
determine whether the information regarding both income and expenses is
substantially correct. Ask your client applicable questions and document her
responses.
2. Explain that the IRS requires all income and allowable expenses be reported on
the tax return.
3. Advise your client that if the IRS or other agency examines the tax return, she will
have to provide support for the income and expenses claimed on the return.
4. You may guide your client through a reconstruction process to arrive at a
substantially correct net profit from the business.
Asking the following questions, and documenting your client’s reasonable
answers
should provide you with enough information to make a reasonable reconstruction of her
records and satisfy your due diligence requirements.
What additional inquiries might you make?
• How did you compute your income? What types of records, if any, do you keep?
• How many children do you care for? Full-time, part-time?
• How much do you charge for full-time and part-time care?
• Do you keep a calendar or schedule of the children present each day?
• Does the business require any licenses or permit. If so, do you have one?
Did you watch the children in your own home or your daycare facility or in the client’s
home?
• If Dana answers that she cares for the children in the client’s home, it may be
reasonable to assume she had no expenses after all.
• If Dana answers that she watches the children in her home or her facility, you
should follow-up with additional questions regarding common business expenses
for individuals who provide childcare services in their home.
Do you purchase food, diapers, toys, supplies, or other items necessary for the
business?
• If Dana answers no, you should consider the reasonableness of this response.
• If Dana answers yes, you should follow-up with additional questions to help her
establish the amount of her expenses. You can guide her through the
reconstruction process or simply offer tips and ask her to return when she is
complete.
o Are the supplies always the same? Where are they purchased? How
often are they purchased? How much are they?
o Do you have any receipts for food, diapers, toys, supplies, etc that you
purchased for the babysitting business?
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