Simply put, “audit-proofing” your tax return means keeping documents which prove your deductions were indeed valid.  While audit rates tend to be low, you should keep good records just in case. This is important if you are a small business owner, as your chances of being audited are slightly higher.

As a rule of thumb, always file your tax return as if you expect to be audited later.  Then if it happens, you’ll be able to support your deductions and win the appeal.

Outside the exception of travel, automobiles, gifts, and entertainment, the IRS normally doesn’t require records in specific forms.  So, to verify what your expenses were, you need to provide records showing how much you paid and proof you paid.  Some ways to document are keeping cancelled checks (front and back) and credit card receipts.  If you lack these, you can use highly legible banking statements as a backup.

Keep in mind:

  1. Check copies should have the check number, payee, amount, and date the check posted.
  2. Credit cards should have the date, payee, and amount.
  3. Electronic fund transfers (ex: wire transfer, ACH payment) should show the payee, amount, and date the transfer posted.

The biggest challenge that small business owners face during an audit is proving expenses were business related.  When you’re tracking your records, always remember to answer this question, “What is the business purpose?”.  An excellent way of documenting your answer, is to write it down in your appointment book (or make notes on your Google Calendar events).  By doing this, you can verify your deductions for meals and entertainment, vehicle expenses, and home office or business property usage.

Daily record keeping is best, but as a busy business owner, you’ll probably have days where this isn’t possible.  Try to get into a habit of tracking this information at least on a weekly basis.  Set a day and a time where you quickly review your calendar/appointment book and jot down when, who, what, and how much.

For more on proper business record keeping, check out the IRS’s Publication 583 “Starting a Business and Keeping Records”.

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