The Importance of Maintaining Accurate Business and Personal Records
As a tax accountant, I spend countless hours preparing personal and business tax returns. I also, spend much of my time explaining what information is to be maintained within the records used for all deductions on the tax return.
What many people don’t understand, is the IRS is only as good as the information provided to it. For example, most people who pay for a mortgage deduct the mortgage interest from their income on the tax return. The IRS usually knows how much mortgage interest a person is allowed to deduct based on the laws in place and the fact they received the same copy of the 1098 you did. Many people deduct student loan interest paid from their income. Again, the IRS receives a copy of the same documents stating how much interest was paid to allow for the deduction.
It seems, though, no matter how many times accountants tell their clients what records are to be maintained, there seems to be a relaxed state of “it won’t happen to me”. Therefore, the records are either not created or maintained. So, here is a case of what can happen if the records aren’t maintained with the proper information:
A business person arrives in tax court prepared to present evidence to the deductions the IRS is disallowing. This individual provided documents including receipts, bank statements, credit-card statements, invoices, check images, calendars, MapQuest directions and copies of travel-reservation confirmations to substantiate deductions on the tax returns. However, the individual’s calendar and MapQuest directions were prepared, at the very least, a year after the individual used his vehicle for business travel. Therefore, it was determined neither was adequate substantiation of the business mileage, date of use, or the business purpose of the vehicle’s use claimed on the tax returns. Also, because the individual could have sought reimbursement for conferences, postage and telephone expenses from his employer, he was not allowed to deduct them on his tax return. Therefore, in the eyes of the law, this loss is of his own choice. Also, the individual was not allowed the deduction of office furniture, as they are not deductible under Code Sec. 162, they are in fact capital expenses. Therefore, these purchases should have been depreciated over their useful life. However, depreciation was also disallowed being these purchases were antiques that will retain or increase their value.
So, in an effort to protect our clients, here is some sound advice:
- When using your vehicle for business purposes and it is not the policy of the company to reimburse you for this expense, always maintain a written ledger (can be electronic). In the ledger note the date, the beginning and ending mileage, the business purpose, and who you spoke with or visited. A great way to log mileage is to have an oil change done on the vehicle on December 30th of every year. This gives a great starting and ending point each year.
- When purchasing office furniture or other business material and services, maintain the actual receipts. The receipt should note what the item is, the date of purchase, the price, and how you paid. Being most receipts are thermal paper, it is best to make a copy or scan the information for electronic storage, however it is advised you maintain the actual receipt as well.
- If you cannot substantiate the deduction, don’t stake claim to the deduction.
- Always remember, when in doubt, ask your accountant for guidance.