Tax Audit tips for Travel, entertainment and education

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 Tax Tips Tax Audit Tips for Travel, Entertainment, and Education How would your tax records hold up in an IRS audit? What? You don’t have much in the way of records, but you think you could get them in shape before the IRS gets to you? Think again. This is highly unlikely to work, for three reasons: 1. You violate the timely records rule, and the IRS is likely to figure this out. 2. You likely don’t have the receipts required. 3. You likely don’t know what you are supposed to document. Now, think of the wasted time you would spend creating records that likely will give you nothing for the effort. That’s what happened to Nathan E. Lang. Employee Expenses Lang claimed $16,327 as employee expenses. The IRS audited Lang’s tax return. How much did the IRS allow in employee-expense deductions? Answer: zero. Business Deductions Lang claimed $17,875 in proprietor expenses on Schedule C. How much did the IRS allow in Schedule C deductions? Answer: zero. What Happened You might ask: how could the IRS disallow everything? Answer: Lang dug his own grave with bad records. Looking for Relief in Court Lang took his case to court. The Tax Court explained the rules that apply to Lang’s deductions as follows:1 1. The IRS is presumed correct in denying all of Lang’s deductions. 2. Lang has the burden of overcoming this presumption and proving that the IRS is wrong. 3. Under Cohan,2 the court may estimate certain deductible expenses if Lang provides sufficient evidence for estimates; but in deciding the deductible amounts, the court must bear heavily against Lang, as such inexactitudes are of his own making. 4. The court may not apply Cohan estimates to travel; meals and entertainment; or listed property, such as a passenger vehicle. The court must disallow these deductions in full if they fail the strict substantiation requirements of Section 274(d) as to amount; time and place; business purpose; and, in the case of meals and entertainment, business relationship.3 Who Is Mr. Lang? On his federal tax return, Lang listed his occupation as graphics. Additionally, Lang is a performing artist who engages in “voice-over” and “on-camera” work. What Happened in Court? In court, Lang produced proof of his deductible union dues of $202 and his tax preparation fees of $425. He also convinced the court to grant him $349 of his claimed $17,875 in Schedule C deductions. This means of the $34,202 in deductions that the IRS denied, Lang salvaged $976 by going to court—what a waste of time. How did Lang allow the IRS and the court to beat him like a rug? Missing Receipts Lang proves the point that bad records can cost you just about every tax deduction. You can testify as to your deductions, but without the records, your testimony is pretty worthless. Think of it this way: When it comes to your taxes, paper talks. And in some circumstances, your smartphone apps can create records that talk to the IRS, as we explained in New in Business? Avoid These Two Tragic Vehicle Deduction Errors. Business Purpose The law authorizes business deductions and then imposes an additional requirement called “proof.” Receipts can offer proof of business purpose, but usually you need more. Building Audit-Proof Support The Lang case illustrates the high cost of not keeping tax records. Think of the time Lang spent getting ready for the IRS and then add the time he spent with the IRS. Think of the time he spent getting ready for court. Think of the time Lang spent in court. All wasted time. So now he is out that time spent forever and out his $33,226 in tax deductions, and he has to pay an accuracy-related penalty of 20 percent on the taxes that he owes. We estimate that Lang spent at least 10 times more time dealing with the IRS and the court than he would have spent keeping the records in the first place (and saving his deductions). You can use any method that meets the law’s requirement to document your deductions. Make sure you know what is needed, and then make sure you have the proof. Tax life is so much simpler this way. Takeaways You are probably like most business people. You don’t get up in the morning excited about keeping your tax records. It’s also likely that you don’t get happy about reconciling your checkbooks or putting ink or toner in your printers, just as the farmers you know don’t get excited about cleaning out their barns. But if you want to be in business and not suffer when the IRS audits your tax returns, you need to keep tax records. This takes a little time, and you should do it daily or weekly. If you wait longer than a week, you · violate the IRS’s timely-records rules, · keep crummier records that cost you tax dollars, and · spend more total time on your tax records than if you had kept them on a timely basis. 2016 Tax Extension Deadlines are approaching. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you can send us all your information through our online secure portal and do your taxes from the comfort of your home or office or come see us at our office. 1040 + Quality Tax Preparation & Financial Services Joseph C Becker EA www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. Revenue department. • Job change. • Divorce or separation. • Marriage. • Self-employment. • Attainment of age 59½ or 70½. • Charitable contributions • Sale or purchase of a business property in excess of $5,000. • Sale or purchase of a residence or other real estate.