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The IRS is being very public about increasing the review of
tax returns. The best defense for you is to be prepared before it happens.
Here are some suggestions:
The one-two punch
To
prove your deduction, most auditors look for two key documents: receipts
and proof of payment.
1. Receipts. This
is the first of the key documents you must have to validate a deduction.
The receipt should clearly show the company or entity, the date, the value
of the activity and a clear description of the activity. In the case of
donations, the receipt should also have a statement that confirms you
received no benefit in return for your donation. It should also state that
you are not retaining part ownership of the donation.
2. Proof of payment. The
second key document to defend your deduction is proof of payment. You will
need a canceled check, a bank statement or a credit card receipt and
related statement.
Contemporaneous is key
Your
proof of payment and receipts should generally match the date of the
activity. The IRS is quick to dismiss receipts that are obtained after the
fact. A good rule of thumb is to ensure receipts and proof of payment are
received at the time of the activity. If not, at least make sure you have
receipts and payment proof within the tax year the deduction is taken.
Other proof is often required
In
addition to the above, there are certain deductions that require additional
documentation. Here are the most common;
Mileage logs. You
will need to show properly-maintained mileage logs for business miles,
charitable miles and any medical mile deductions.
Business records. You
will need financial statements for any business-related activity with
supporting documentation.
Residency. If
you live in multiple states or multiple countries, you may have to prove
where you lived during the year. In addition, to receive the capital gain
exclusion for a home sale, you will need to prove residency for two of the
last five years. So keep records that show your physical presence to
support your tax filings.
Non-reimbursement. If
you claim any education credits, you will need to show that you actually
spent money for qualified expenses at qualified institutions. You will also
need to show that your claimed expenses were not reimbursed through
scholarships or grants.
Defending
your tax return during an audit can seem daunting. Fortunately, with some
thoughtful planning, an audit can readily turn into a NO CHANGE audit.
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