Which report is essential for taxpayers to substantiate tax compliance?

The essential report for taxpayers to substantiate tax compliance is the tax return. This document is required by tax authorities and provides a comprehensive summary of a taxpayer's income, deductions, and tax liability. It serves as the official record of the taxpayer's earnings and the taxes owed, ensuring that the taxpayer is in adherence with tax laws and regulations.

Filing a tax return is a legal obligation for most individuals and businesses, and it allows the tax authority to assess whether the correct amount of tax has been paid. The accuracy of the information in the tax return is crucial, as it can significantly impact the taxpayer's financial standing and legal compliance.

In contrast, while a financial audit report may offer insights into a company's overall financial health, it does not specifically address tax compliance. An annual report provides a broader overview intended for shareholders and stakeholders and may include tax information but is not primarily focused on tax compliance. A balance sheet, which presents a snapshot of an entity’s assets, liabilities, and equity at a specific point in time, does not contain the necessary details to substantiate tax compliance on its own. Thus, the tax return stands out as the critical document directly linking taxpayers to their tax obligations and compliance status.