Tax Tip of the Week – Keep Accurate Records!

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We all wish we could just take somebody’s word and not have to worry if they are telling the truth or not. But, as we all know, the world does not work like that. If it did, the IRS Auditor would not exist. Their job is basically to check and see if you told the truth on your tax return. Their motto is “if you can’t prove it; you can’t take the deduction.” It’s not very catchy but it is the IRS after all.

Piggy hiding Your itemized and business deductions are a great way to cut your taxes; but, unless you can prove that your deductions and income exclusions are legitimate, they can be thrown out. No matter how legal the deduction is – precise records are the key to backing up any write-off. The IRS auditors are currently taking a hard line on this by throwing out any undocumented deduction.

You don’t need to compile a mountain of papers and files to satisfy the IRS. Just use an appointment book or a day planner; and then, each evening or during the day, write down every activity that might affect your taxes. Better yet, keep accurate records using a web based calendar program that you can access at work, at home or even with your IPhone or BlackBerry. I would recommend Yahoo or Google calendar and, for business owners, SalesForce.

Denied Also, be sure to keep all receipts and cross reference them to your accounting program by writing the check number on the receipt. One misconception is that a copy of the check is enough. Without a receipt, you still may lose the deduction during an audit. Receipts are also required when you pay with a debit or credit card (your bank and credit card statement is not enough). One way to beat the paper avalanche is to scan the receipts into your computer. We use a program that allows us to scan or fax the actual document to a web based paperless system. If we need a copy of a receipt, we can easily search for it and print it. Call us if you are interested in this type of a solution.

The IRS Auditors are sticklers when it comes to examining travel and entertainment expenses. For these expenses, in addition to a receipt, you need to document who traveled or was entertained and what was the business purpose of the travel or the entertainment. The best solution is to just write this information on the receipt itself.

The best way to document the business use of a car is by keeping a log in the glove box or on an electronic day planner. Failing that, you should use your personal calendar at tax return preparation time to reconstruct business trips and mileage.

If this sounds like a pain – it is! But, consider this, coming up with the cash to pay Uncle Sam 15% to 40% can be a much bigger one! The way the government is spending money this year, I’m sure they need the money more then you – right?