Audit Proof My Tax Return
When it comes to acquiring real estate there are three rules; location, location and location. When it comes to audit proofing your tax return there are also three rules; documentation, documentation and documentation. Thus, the best way to audit proof your tax return is by utilizing proper record keeping techniques.
Your records must be accurate and complete and prepared in a timely way. Documentation is the key to proving your tax position. The IRS says in its official publications that you must hold records that support accurate tax returns. The records should be made at or near the time of the expense when there is accurate recall. Such records must be lasting, accurate, and complete. Failure to meet the adequate documentation standards of the Internal Revenue Code can result in disallowance of your valid deductions. The burden of proof is on you.
There are 3 types of records that you must maintain.
(Note: You want a filing system, not a piling system – no extra charge for that one.)
You need the following:
1. Permanent files
2. Regular yearly files
3. A daily tax diary or log
Permanent files: Includes your will, your prior years’ tax returns, investment purchases and sales, equipment and real estate purchase records, home purchase records, home improvement records, insurance policies, closing statements, deeds, etc.
Regular annual files: Includes sales invoices, receipts, time sheets and payroll records, statements from your bank, vendor’s receipts, credit card statements
Daily tax diary or log: This may be your appointment book or similar type log. If you don’t maintain a daily tax diary and you get audited by the IRS, be sure to bring your checkbook with you to the audit.
Now what should the daily tax diary include? Your daily tax diary should include:
- Your appointments
- Where and when you travel, for example out of state travel
- Where you travel by auto – your automobile log in other words
- Where and when your entertain your business associates, specifically business meals and entertainment expense documentation must include:
How much, when, where, why and who-The amount of the expense, the date, where it took place, what was the specific business purpose, and the business relationship of the person involved
The basic elements to be proved are: Amount, Time, Place, Purpose and Relationship
Note: A canceled check or credit card charge slip, together with a bill or receipt from the payee, ordinarily establishes the amount of expenditure. However, a cancelled check or charge slip does not by itself support a business expense without other evidence to show that it was for a business purpose. The bill or receipts determines what you actually purchased.
Note: Be very careful in using banks that do not provide proof of cancelled checks.
This article was written by Joe Moughon, CPA and owner of Small Business Tax Dedcutions. For more information about small business accounting please visit his web site at: JoeMoughon.com.
If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!
No tags for this post.
Tags: 
Loading ...