Tax Returns that May Be Requested in a Financial Investigation

by

James J. Vaughn, CPA
Senior Auditor
U.S. Treasury Department
Bureau of Alcohol, Tobacco, and Firearms

Tax returns, both state and federal, provide substantial information. Federal tax returns, filed with the Internal Revenue Service (IRS), can only be obtained with federal court order. When federal tax returns are obtained from court order they may only be used in federal court. If a state trial is anticipated, tax returns should be obtained from state tax authorities.

Tax returns filed with the IRS and state taxing authorities should be compared to tax returns used to obtain loans. Often the banks have returns that have been embellished. This may lead to bank fraud charges.

The following tax returns may be of interest in a financial investigation:

Form 1040 U.S. Individual Income Tax Return: This is a personal tax return. The form contains a Schedule C. This schedule contains information about income and assets. Inventory levels may be established from the return. The inventory amount on the return will help substantiate the inventory on the insurance claim. Depreciable assets are listed on the return as a deductible expense.

Form 1120 U.S. Corporation Income Tax Return & 1120S U.S. Income Tax Return for an S Corporation (Schedule K-1 (Form 1120S) Shareholder's Share of Income, Credits, and Deductions, etc.) and Form 1065 U.S. Partnership Return of Income (including Schedule K-1 (Form 1065) Partner's Share of Income, Credits, Deductions, etc.): These returns have balance sheets. The Balance Sheets will identify the purchase price and book value of assets at the time of the fire. Balance Sheets can be used to establish the gain from the fire. The owner's investment may be established from these returns.

Payroll Form 941 Employer's Quarterly Federal Tax Return and Form 940 Employer's Annual Federal Unemployment (FUTA) Tax Return: These forms will establish employment levels.

In addition, Sales Tax records will establish business trends and Real Estate taxes help put a fair market value on property. If the property is over insured these bills will assist.

reprinted by permission