How To Audit Proof Your Tax Return Forever A Recent Close Encounter Of
The Irs Kind

How To Audit Proof Your Tax Return Forever A Recent Close Encounter Of The Irs Kind

How to​ Audit-Proof Your Tax Return Forever: a​ Recent Close Encounter Of the​ IRS-Kind
Congress has passed legislation that is​ supposed to​ result in​ a​ more sensitive Internal Revenue Service .​
You know,​ not such a​ lean,​ mean,​ tax-collecting machine.

Hmmm .​
What do you​ think?
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​ person to​ discuss the​ situation.
Mr .​
Jones (a local small business owner) was required to​ show up at​ the​ local IRS office with all his records .​
The IRS was questioning the​ legitimacy of​ several business deductions -- and so the​ IRS was doing what it​ is​ allowed by law to​ do -- demand that the​ taxpayer prove that those deductions were valid.
Turns out that Mr .​
Jones lost the​ audit and ended up owing the​ IRS a​ significant amount of​ money -- the​ additional 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:
Mr .​
Jones lost several deductions simply 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​ provide written proof that the​ deduction really 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​ credit card statement .​
Mr .​
Jones reported numerous deductions for which he simply 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 around 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​ different 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 business for so many years that he just knew how much it​ cost to​ purchase certain things .​
Well,​ this is​ the​ kind of​ taxpayer that the​ IRS loves! It really 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 common questions I​ am asked by clients is​ this: I​ know I​ paid for something,​ but I​ don't have a​ receipt .​
Should I​ still report the​ deduction .​
My response is​ usually 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 comment with my tongue planted firmly in​ cheek,​ but there really is​ a​ lot of​ truth to​ it .​
If you​ don't have the​ documentation to​ prove a​ deduction,​ you​ can still report 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:
It turns out that Mr .​
Jones wasn't completely honest with me about some of​ his deductions .​
He reported deductions that simply were not real deductions .​
Here's one example: Mr .​
Jones owned several rental houses .​
These rental houses,​ of​ course,​ required maintenance and repair work .​
Many times Mr .​
Jones would do the​ work himself rather than pay someone else to​ do the​ work .​
Well,​ Mr .​
Jones would estimate what he would have had to​ pay someone else to​ do the​ work that he did himself,​ and then he would report that amount as​ a​ deduction,​ even though he didn't actually pay anybody to​ do the​ work.
In other words,​ Mr .​
Jones deducted the​ value of​ his time -- which is​ non-deductible.
This is​ an​ important point -- you​ can never legitimately deduct the​ value of​ your time for work you​ did .​
You have to​ actually pay someone else to​ do the​ labor .​
If you​ ever get a​ letter from the​ IRS demanding additional 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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