How to Audit Proof Your Tax Return.

When it comes to acquiring real estate there are three rules; location, location and location. When it comes to audit proofing your tax return there are also three rules; documentation, documentation and documentation. Thus, the best way to audit proof your tax return is by utilizing proper documentation. Arm yourself with good records.

Your records must be accurate and complete and prepared in a timely fashion. Documentation is the key to proving your tax position. The IRS states in its official publications that you must maintain records that support accurate tax returns. The records should be made at or near the time of the expense when there is accurate recall. Such records must be permanent, accurate, and complete. Failure to meet the adequate documentation standards of the Internal Revenue Code can result in disallowance of your valid deductions. The burden of proof is on you.

There are three types of records that you should maintain. (Note: You want a filing system, not a piling system – no extra charge for that one.)

You will need the following:
1. Permanent files
2. Regular annual files
3. A daily tax diary or log

Permanent files: Includes your prior years’ tax returns, your will, investment purchases and sales, equipment and property purchase records, home purchase records, home improvement records, insurance policies, closing statements, deeds

Regular annual files: Includes sales invoices, vendor bill or receipts, time sheets and payroll records, bank statements, credit card statements

Daily tax diary or log: This may be your appointment book or similar type log. If you don’t maintain a daily tax diary and you get audited by the IRS, be sure to bring your checkbook with you to the audit.

Now what should the daily tax diary or log include? Your daily tax diary or log should include:
• Your appointments
• Where and when you travel, for example out of town travel
• Where you travel by auto – your automobile log in other words
• Where and when your entertain your business contacts, specifically business meal and entertainment expense documentation must include:
The amount of the business expense, date it took place, where it took place, what was the specific business purpose, and the business relationship of the person involved (How much, when, where, why and who)
The basic elements to be proved are: Amount, Time, Place, Purpose and Relationship

Note: A canceled check or credit card charge slip, together with a bill or receipt from the payee, ordinarily establishes the amount of expenditure. However, a cancelled check or charge slip does not by itself support a business expense without other evidence to show that it was for a business purpose. The bill or receipts determines what you actually purchased. A credit card statement alone is not enough proof.

Note: Be very careful in using banks that do not provide proof of cancelled checks.