DOCUMENTATION – THE KEY TO

ELIMINATING YOUR FEAR OF THE IRS

William E. Hesch, CPA, JD, PFS

April, 2009

A.          Documentation, Documentation, Documentation.

This is the best medicine for eliminating your fear of the IRS.  With adequate documentation you should eliminate any fear of the IRS challenging your tax return.  With original receipts, cancelled checks, and a detailed summary of the documentation for each expense being claimed on the tax return you will breeze through an IRS audit.

The IRS is looking for the following three items in your documentation:

• Amount and description of each expenditure  

• Date of the expenditure

• Business purpose of the activity

Most business receipts have the documentation regarding the amount, description, and date on the face of the receipt.  The business purpose of the activity or expenditure may or may not be apparent on the face of the receipt.  However, what is important is the RECEIPT.  Therefore, if you find that you do not have receipts for last year’s tax deductions then you should have an envelope each month in which you put all of your business receipts on a daily basis.

              Most of us are not organized and disciplined enough to place our business receipts in an envelope on a regular basis.  If that is a problem that you are experiencing then I recommend that you pay all business expenses either with a check or a separate credit card which is to be used solely for business.  Many major credit card companies will provide a year-end statement which summarizes your expense categories for the year.  However, the credit card statement is not adequate documentation for an IRS audit.  You do need to keep the receipts for the IRS to review.

B.          Business Car Expenses

              Again documentation, documentation, documentation is the key ingredient for successfully audit-proofing your business automobile tax deductions.  The IRS allows you to deduct your automobile expenses using either your actual expenses or the 55 cents per mile standard mileage rate for 2009.  The mileage rate eliminates the need to keep repairs and gas receipts but it does not eliminate the need for mileage records to be broken down between personal, commuting, and business mileage.

              Few people keep a complete log of all business and personal appointments showing exactly how many miles were driven daily for each trip.  Accordingly, the IRS has adopted the 90 day log and first week rules in their regulations to assist taxpayers in substantiating the business use of their car.  The first IRS rule provides that you can keep detailed mileage records for the first three months of the year to substantiate the entire year if your business use of the vehicle follows the same pattern for the remaining nine months of the year.  The second rule provides that if you keep an automobile log for the first week of each month and can prove by adequate records that your business use for the remainder of each month was consistent with that of the first week then the business mileage computer during the first week of each month can be applied to the whole year.

Documentation of appointments is necessary in your appointment book to prove consistent business use whether using the 90 DAY RULE or the FIRST WEEK RULE.  If you have not already documented your automobile usage in the 2008 then you are permitted to reconstruct your 2008 mileage based upon your 2008 appointment book.

C.          Home Office

              Again documentation, documentation, documentation.  Business expense deductions for your home office include a portion of the following home expenses: mortgage interest, real estate taxes, rent, utilities, general home repairs, and insurance.  The law is strict about who qualifies for home office deductions.  Taxpayers are not entitled to deduct any expenses for using their home for business purposes unless the expenses are attributable to a portion of the home (or separate structure) used exclusively on a regular basis:

• as the principal place of any business carried on by the taxpayer;

• as a place of business that is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of business; or

• in connection with the taxpayer’s business if the taxpayer is using a separate structure that is appurtenant to, but not attached to, the home (Code Sec. 280A(c)).

If the taxpayer is an employee, the business use of the home must also be for the convenience of the employer.  The allowable deduction is computed on Form 8829, Expenses for Business Use of Your Home.

RECORDS SHOULD BE MAINTAINED REGARDING ALL CLIENT MEETINGS, including the client’s name, nature of the business transaction, and length of time involved in the appointment.

D.          Entertainment Expenses

Again documentation, documentation, documentation.  In order to deduct entertainment expenses you must provide the amount, date, business purpose, name and address of the place of entertainment, and the business relationship to the person entertained.  Further, in addition to the documentation requirements, entertainment expenses must either be directly related to the active conduct of your business or associated with your business, i.e. the expense is for entertainment directly before or after you have a substantial and bona fide business discussion. 

TAX ALERT - - the IRS requires taxpayers to keep a receipt for any entertainment and meal expense of $75.00 or more.  No receipts are needed for entertainment and meal expenses if the amount is less than $75.00.

In conclusion, documentation is the key for eliminating your fear of the IRS.  Special rules or shortcut methods have been provided by the IRS in order to ease the burden of record keeping.  However, minimum thresholds of documentation are absolutely imperative in order for you to truly eliminate your fear of an IRS audit.  Again DOCUMENTATION, DOCUMENTATION, DOCUMENTATION.