Reduce the Risk from an IRS Audit
There are many simple and effective ways to greatly reduce the possibility of an IRS audit. Since there is no definite method to avoid it all-together, being prepared is always the best strategy. The following excerpt from “Loopholes of the Rich” by Diane Kennedy, CPA, provides straightforward information on IRS documentation requirements and record retention.
Before the Letter Arrives
Reduce the risk from an IRS audit before you even get a letter by always having proper documentation, corporate minutes, properly executed agreements, and copies of invoices and canceled checks neatly filed.
The IRS will expect you to produce the following documents:
- Bank statements, canceled checks, and receipts.
- Books and records. A good accounting software program such as QuickBooks Pro will provide the necessary information, as long as the information has all been accurately and competently entered.
- Appointment books, logs, and diaries. Businesses generally track appointments using calendars, business diaries, or appointment books that are shown either manually or on computer programs. These can provide excellent additional proof for business expenses.
- Automobile records. A log is the best way to track business use of an automobile, but it is not strictly required by the tax code. Another plan would be to keep all gas and repair receipts in an orderly fashion with notations of trips showing how the car was used for business. A less accurate way is to simply add up the gas receipts and divide by the number of miles per gallon that your car averages.
- Travel and entertainment records. You must have a written record of the specific business purpose for the travel or entertainment expense, as well as a receipt for it. For entertainment, the amount of each separate expenditure must be substantiated.
How Long Do You Need to Keep Records?
Following is a snapshot look at various records and the recommended time to retain them. The major categories are:
- Supporting records. You must keep records until the statute of limitations for the return expires. Ordinarily, the statute of limitations for an income tax return expires three years after the return is due to be filed or is filed, or two years from the date that tax is paid, whichever is later. In some cases, you must keep records indefinitely. For example, if you change your method of accounting, records supporting the necessary adjustments may remain applicable for an indefinite time.
- Employment tax records. You must keep all employment tax records for at least four years after the date on which a tax return becomes due or the tax is paid, whichever is later.
- Tax returns. You should keep all copies of your filed tax returns for all years. They will help you in preparing your future tax returns, and in making computations if you later file a claim for a refund. They may also be helpful to the executor or administrator of your estate, or to an IRS examiner if your original return is not available.
There are many simple and effective ways to greatly reduce the possibility of an IRS audit. Since there is no definite method to avoid it all-together, being prepared is always the best strategy. The following excerpt from “Loopholes of the Rich” by Diane Kennedy, CPA, provides straightforward information on IRS documentation requirements and record retention.
Before the Letter Arrives
Reduce the risk from an IRS audit before you even get a letter by always having proper documentation, corporate minutes, properly executed agreements, and copies of invoices and canceled checks neatly filed.
The IRS will expect you to produce the following documents:
- Bank statements, canceled checks, and receipts.
- Books and records. A good accounting software program such as QuickBooks Pro will provide the necessary information, as long as the information has all been accurately and competently entered.
- Appointment books, logs, and diaries. Businesses generally track appointments using calendars, business diaries, or appointment books that are shown either manually or on computer programs. These can provide excellent additional proof for business expenses.
- Automobile records. A log is the best way to track business use of an automobile, but it is not strictly required by the tax code. Another plan would be to keep all gas and repair receipts in an orderly fashion with notations of trips showing how the car was used for business. A less accurate way is to simply add up the gas receipts and divide by the number of miles per gallon that your car averages.
- Travel and entertainment records. You must have a written record of the specific business purpose for the travel or entertainment expense, as well as a receipt for it. For entertainment, the amount of each separate expenditure must be substantiated.
How Long Do You Need to Keep Records?
Following is a snapshot look at various records and the recommended time to retain them. The major categories are:
- Supporting records. You must keep records until the statute of limitations for the return expires. Ordinarily, the statute of limitations for an income tax return expires three years after the return is due to be filed or is filed, or two years from the date that tax is paid, whichever is later. In some cases, you must keep records indefinitely. For example, if you change your method of accounting, records supporting the necessary adjustments may remain applicable for an indefinite time.
- Employment tax records. You must keep all employment tax records for at least four years after the date on which a tax return becomes due or the tax is paid, whichever is later.
- Tax returns. You should keep all copies of your filed tax returns for all years. They will help you in preparing your future tax returns, and in making computations if you later file a claim for a refund. They may also be helpful to the executor or administrator of your estate, or to an IRS examiner if your original return is not available.