Small business Taxes - How to Eliminate All Fear of an Irs Audit

Cheek Law Offices - Small business Taxes - How to Eliminate All Fear of an Irs Audit

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A few months ago, one of my clients (let's call him Mr. Jones) got one of those Irs "love letters" requesting more information about his return, and the Irs wanted to meet with Mr. Jones in man to discuss the situation.

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Mr. Jones (a small enterprise owner) was required to show up at the local Irs office with all his records. The Irs was questioning the legitimacy of any enterprise deductions. The Irs was doing what it is allowed by law to do -- inquire that the taxpayer prove that those deductions were valid.

Turns out that Mr. Jones lost the audit and ended up owing the Irs a important number of money -- the supplementary tax, plus penalty and interest for late payment of that tax. Why did Mr. Jones' lose the audit? Mr. Jones made two "classic" taxpayer mistakes:

Mistake #1: "No Receipt, No Deduction"

Mr. Jones lost any deductions plainly because he didn't have the proper documentation to prove the deductions. What do I mean by "documentation"?

Well, if the Irs requires you to substantiate a deduction on your tax return, you must be able to contribute written proof that the deduction no ifs ands or buts happened. The easiest way to prove a deduction is to hang on to: a) The receipt or invoice, and b) Proof of payment, which can be a canceled check, cash receipt, or reputation card statement.

Mr. Jones reported numerous deductions for which he plainly didn't have the documentation. No receipts, no canceled checks, no nothing. Turns out that Mr. Jones was one of those "cash guys". Maybe you know what kind of guy I'm talking about -- he never wrote a check in his life, just carried a wad of cash colse to in his pocket. He paid for everything with cash, and never kept any of his receipts.

Every year he'd sit down with his wife and "remember" how much he spent on dissimilar things. No way to prove any of this, of course. He just had a "feel" for how much cash he had spent, and he had run his enterprise for so many years that he just "knew" how much it cost to buy definite things.

Well, this is the kind of taxpayer that the Irs loves! It no ifs ands or buts is true -- if you can't prove that you paid for something (with receipts, invoices, canceled checks, etc.), then you run the risk of losing that deduction in the event of an audit.

One of the most tasteless questions I am asked by clients is this: "I know I paid for something, but I don't have a receipt. Should I still narrative the deduction." My response is commonly this: "You only need a receipt if you get audited."

At first, people don't know if I am joking or not. Well, I do make that annotation with my tongue planted firmly in cheek, but there no ifs ands or buts is a lot of truth to it. If you don't have the documentation to prove a deduction, you can still narrative the deduction (if you want), because you only have to prove the deduction if you get audited.

But if you do get audited, knowing that there are undocumented deductions on the return, be prepared to lose the deduction. Fair enough?

And here's the other major mistake that Mr. Jones made:

Mistake #2: Bogus Deductions

It turns out that Mr. Jones wasn't thoroughly honest with me about some of his deductions. He reported deductions that plainly were not real deductions. Here's one example: Mr. Jones owned any rental houses. These rental houses, of course, required maintenance and fix work. Many times Mr. Jones would do the work himself rather than pay man else to do the work.

Well, Mr. Jones would assessment what he would have had to pay man else to do the work that he did himself, and then he would narrative that number as a deduction, even though he didn't no ifs ands or buts pay any person to do the work.

In other words, Mr. Jones deducted the value of his time -- which is non-deductible. This is an prominent point -- you can never no ifs ands or buts deduct the value of your time for work you did. You have to no ifs ands or buts pay man else to do the labor.

If you ever get a letter from the Irs demanding supplementary information, you'll have nothing to worry about if you do exactly the opposite of what Mr. Jones did. If you can properly document your deductions and assuming you have no bogus information, you'll pass the audit with flying colors.

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