Question

In working with a client named Fred, you realize that he did not report income that he should have on a return. Fred reported $10,000 of income on the return but should have reported $13,500. What is Fred’s obligation going forward regarding this incident?
a) Fred must maintain records for 5 years from the year the return was filed
b) Fred must maintain records for 6 years from the year the return was filed
c) Fred must maintain records for 8 years from the year the return was filed
d) Fred must maintain records for 10 years from the year the return was filed

Answer 1

Answer:

b) Fred must maintain records for 6 years from the year the return was filed

Explanation:

A person that prepares tax is required by the Internal Revenue Service to keep tax returns and supporting documents for at least 3 years.

However when the tax preparer fails to report correct income amount they are required to keep records for at least the last 6 years.

The underreported income must be greater than 25% of the income.

In the given scenario the Fred reported $10,000 instead of $13,500.

The unreported amount is $3,500

Percentage not reported = (3,500 ÷ 13,500) * 100 = 25.925%

So Fred will need to keep records for the next 6 years