March 30, 2017

Denver Tax Attorney   What Documents Should I Prepare for an IRS Audit?A tax audit is a review of your financial information and accounts by an IRS agent or state auditor. An audit ensures that you properly reported your income, expenses, and credits according to tax laws.

Audits may not be uncommon, but defending yourself in an IRS audit can be both stressful and time-consuming. The IRS will ask for specific documents and records that show how you arrived at the dollar amounts reported on your tax return. As such, you will greatly benefit from maintaining organized documents and keeping good records, as well as knowing which records you should keep.

Retail receipts, bank statements, credit card statements and donation receipts can prove what you have spent your money on. The IRS auditor will want to see records from all your accounts—both personal and business. You may need to present canceled checks written to pay for a home, contributions to an individual retirement account, or as payment for charitable contributions over the last seven years. If business-related expenses were paid with cash, you may need to present paperwork that shows these payments, including petty cash vouchers, receipts, or handwritten notes.

Since most business expenses are charged on debit or credit cards, the IRS typically accepts charge card and bank statements as proof of payment. These statements must indicate the payee’s name, date, address, and the amount paid. These may not suffice as your only records, however, as these statements do not usually show the business nature of the expense.

The IRS will also ask to see your books, even if the tax code does not require small businesses to maintain a formal set of books. If you do not have ledgers and journals to present, you may be able to show records using your checkbook or a printout of your notes on the computer.

Businesses offering services often keep records of activities and expenses using appointment books, calendars and business diaries. Entries in a business diary may help justify an expense, provided these seem reasonable. You may also need to present logs in your IRS audit. If you are claiming a mileage deduction for business, medical or moving purposes, for instance, it is essential that you present a trip log. If you are writing off gambling earnings, you will need to show a log for your losses and winnings.

Compared to most expenses, out-of-town business travel and entertainment expenses require more detailed record keeping. You must be able to furnish a written record of the business purpose of the travel or entertainment expense, as well as provide any accompanying receipts for it.

Special records may be needed for certain equipment generally used for both personal and business purposes, known as listed property. These include cell phones and computers kept at home but used for business. Another example of listed property is a vehicle, and business use of your personal vehicle requires records that show the work use portion such as a log or gas and auto repair receipts.

Though you may not be required to present all these documents at your audit, it is always better to be prepared. If you are dealing with a complex audit, seek help from a competent tax professional as soon as possible.

Categories: IRS