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What records do I need in an IRS Audit

Jan 29, 2024 | Tax resolution | 0 comments

IRS Info Needed

What records do I need in an IRS Audit

Taxpayers are required to maintain books and records

When a taxpayer is audited by the IRS, the burden of proof falls on the taxpayer to support the information on his or her return. The United States Tax Court has ruled that the taxpayer must keep “contemporaneous” records (Reg 1.6001-1). Contemporaneous means “existing or occurring in the same period of time.”

What happens if the records either no-longer exist, cannot be easily located, and the books were never maintained (created or done)?  Records can be destroyed by flood, fire, etc. Then the taxpayer needs to reconstruct records.

I can't Believe this.

Records can be reconstructed by using:

  • Bank Statements
  • Credit Card Statements
  • Receipts
  • Vendor Invoices

 

Records can be reconstructed by relying upon estimates. This is using the “Cohan rule.”

When using estimates the taxpayers face two major issues: “First, the taxpayer must demonstrate the existence or fact of the claimed expense. Second, the taxpayer must demonstrate the amount of the claimed deduction.” Journal of Accounting.   Remember, the IRS is under no obligation to accept your estimations.

The Cohan Rule has limitations. Congress perceiving abuse has legislated that certain deductions have “documentation.”  Expenses requiring documentation include meals, travel, charitable deductions, etc. Absent of documentation there is no allowable deduction.  “It is important to note that the regulations do not allow for a re-creation of the expense log…. Substantial documentation includes “an account book, diary log, statement of expense, trip sheet, or similar record must be maintained” Journal of Accounting

Meal documentation includes: 1) substantiation that the meal was for business purposes (substantiation can include – notes on what was discussed etc.) 2) who was in attendance, 3) date, 4) amount of the meal, and 5) the amount of tips paid.

Remember, the taxpayer must prove the existence of the expense/deduction by credible evidence.

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