We have all read the headlines; “IRS receives $80B to hire 87,000 new agents over the next decade”. Does this mean increased audits? Probably, who knows for certain but time will tell.
Our role is to help keep you in compliance. Tax avoidance and tax evasive are radically different. Tax avoidance helps lowers your tax bill by PROPERLY structuring transactions so you reap the benefits within the guidelines of the law. There are times you will feel like the poodle jumping through the ring of fire, but we need to properly navigate the tax landscape to ensure we are entitled to the deductions to lower your tax bill. Tax Evasion on the other hand is illegal and is an attempt to reduce your tax bill through underreporting, concealment, deceit or subterfuge. Tax evasion gets you 3 meals and a cot.
Records to Keep to Allow Deductions in An Audit
1. Keeping receipts
The easiest way to lose an audit is to have no proof of what you purchased. If you do not keep your receipts/invoices, you have no way of substantiating to IRS the business purchase of the expense.
a. Expenses paid by check
– If you keep paper records, we recommend keeping the copies of the invoices you pay each month in a month-by-month folder (the bills you pay in January in a January folder and not by vendor). All IRS audits are by period and not by vendor. It will require more of your time later to sort the receipts by month for the audit.
- i. Digital records – If you use QuickBooks or some other software, most have a function that you can scan the receipt and attach it directly to the check you paid
b. Credit card receipts
– If you use a credit card for purchases, you must keep the receipts as substantiation for the deduction. Again, no receipt, no deduction allowed in an audit. Think of this from IRS’s point of view. If you have a Sam’s or Costco purchase and no receipt, they have no idea what you purchased. It could have been baby diapers and shampoo and not office supplies.
- i. Keep paper receipts – Recommend you staple the receipt to the back of the credit card statement each month. For debit card transactions, they can be stapled to the bank statement.
- ii. Digital Records – We recommend apps like Expensify where you can scan the receipt and record any details required to the receipt.
Remember that IRS requires special rules for meal receipts. You need to document with whom you met and what you discussed to be allowed in an audit.
We as preparers are responsible for the information on the return and have very large penalties for failing to comply with the law. We know our advice is not always what you want to hear, but sometimes it is what you need to hear to keep you safe in an audit and keep more of your money in your pocket.
Thanks for allowing us to help guide you through the complicated rules of owning a business. Contact us today to schedule a meeting with our tax experts.