Monday, August 8, 2022

Pitfalls from Recent IRS Audits - Part 2

 Here is Part 2 of Pitfalls from Recent IRS Audits.


1. You didn’t properly document your business meals.

Meals have some extra documentation requirements, above and beyond normal expenses. You have to be able to show the amount of the meal, the date of the meal, the location of the meal, the business purpose of the meal, the number of people served, and who was present at the meal. A receipt for the meal only gets you halfway there. You should be keeping the receipt for the meal AND jotting down the business purpose and people attending on that receipt. A further trap with business meals is that receipt ink tends to fade over time, and restaurants seem to use the cheapest ink. So even if you do keep your receipts, you might find that the ink has become virtually invisible when you look at them two years later. Once again, an app like Dext*, where you take a photo of the receipt, will protect you from disappearing receipt ink.






2. You thought it would be easy to justify travel expenses.

You bought a plane ticket and flew out to a business conference, staying in a hotel for a few days. Seems like an easy business trip to justify, right? Wrong. Don’t assume your IRS auditor is willing to apply common sense to business travel. For example, your auditor will want to see your receipts, of course, but they will also want to see an itinerary and conference schedule. They want you to demonstrate that you actually spent your time doing business things on your trip. We once had an auditor go so far as to ask for boarding passes and luggage claim tickets (were they worried that the taxpayer didn’t board the plane?). Did we mention recently that we love Dext*? It’ll store more than receipts. Take a photo of schedules, itineraries, boarding passes, baggage tickets and submit them, and they’ll be there when you need them.

Business travel that doesn’t have a formal itinerary can be even harder to substantiate. What if you’re meeting with clients in another city, or conducting research? Maintain an appointment log, a calendar, keep email confirmations for your appointments, follow up with emailed meeting summaries, and any other documentation that might help show what you were doing on that trip.

3. You overlooked documentation for your deposits.



Most of us focus on how to justify our expenses under audit, but audits don’t stop with expenses. An auditor will sometimes decide to review every deposit in all of your bank accounts, searching for unreported income. Here are some examples of things an auditor might decide to count as “income”: Loan proceeds, insurance refunds, gifts, reimbursements from your friends for expenses, transfers between spouses who have separate bank accounts. They might even count transfers between your own bank accounts, or cash deposits of income you reported elsewhere, if you can’t easily show where that money came from. Many banks won’t show you images of deposits, which can make it hard for you to identify the deposits. In addition to this, it’s important to keep things like loan documents, letters about refunds, notes about gifts or reimbursements.

 

* This isn’t a paid advertisement for Dext, and we don’t get any kickbacks from them. We really do like them!

Find Part 1 here.


Pitfalls from Recent IRS Audits - Part 1

Here is Part 1 of Pitfalls from Recent IRS Audits.


1. You diligently kept your mileage log, but the auditor wants more.

We love apps like MileIQ* to help you keep your mileage log, but don’t stop there. Auditors will generally ask for third party documentation showing your odometer reading. They want to see documents from repair shops, oil changes, tire changes that show your odometer reading recorded by a third party. They use this to assess whether your mileage log is reasonable.

 


2. You lost access to account statements.

Most people assume they can get information from the bank or a utility company when they need to. We happily check the box for electronic statements and forget about it. Unfortunately, many online banking platforms won’t let you download statements that more than 12 months old. If your account is still open, you can probably get your bank or utility company to provide older statements and check images, but if your account is closed, it’s possible that you won’t be able to get access to old records. Audits usually happen two years after you file, and a lot can happen in two years. We recommend that you download all of your statements at least once per year. This goes for banks, credit cards, utilities, phone companies, and other similar companies.

 

3. You lost access to an email account or email storage.

We don’t tend to print and store invoices and receipts that are sent to our email. If you don’t have unlimited storage in your email, you may be surprised to find that old emails and receipts were lost because your email provider automatically deleted your emails after a time. If you’re using your email inbox as storage for important documents, make sure those emails will be available to you years later when you need them. Be careful if you’re using a work email address that you’ll potentially lose access to if you change jobs. An app like Dext* allows you to forward emails into its storage system.


* This isn't a paid advertisement for Dext or MileIQ, and we don't get any kickbacks from them. We really do like them!


Find Part 2 here.

Who's Afraid of the Big Bad IRS Auditor?

 

The Inflation Reduction Act allocates $80 billion to the IRS so that it can increase the number of audits. As of June 25, 2022, the IRS returned to the office (that’s right… they were still not in the office), and they expect to increase audit activity. Self-employed individuals and small business owners can be particularly at risk when being audited, because they don’t have an office staff to keep all of their records in order.




Your best defense against an audit is to maintain good documentation of your expenses. Many people assume that a bank statement or credit card statement is sufficient documentation, and they are shocked to discover that their auditor wants more. Generally, to get an IRS auditor to accept an expense, you need to provide a bank or credit card statement AND a receipt or invoice for the expense.

If you Google around about documentation requirements, a lot is made of the “Cohen Rule,” which is a rule set down by the Tax Court that if a taxpayer doesn’t have adequate records, they can still claim expenses if they are reasonable and credible. Here’s the catch: Your IRS auditor won’t care about the Cohen Rule. They’ll disallow your expenses and let you take it up with Tax Court. Most taxpayers would prefer to avoid heading to court to argue their expenses.

The same can be said about a lot of auditor overreach. Auditors will frequently ask for documentation that is technically not required. Your documentation might technically be sufficient, but you still find yourself fighting an uphill battle. This can feel very unfair, but remember that the auditor will take the position that the place to argue tax law is in Tax Court.

We advise that you keep EVERYTHING. Our favorite app for document storage is Dext*, but any document storage system that you use consistently works. The important thing is that you have the documents.

Stay tuned for some pitfalls that we’ve encountered in recent audits we’ve defended.

Audit Pitfalls Part 1 here.

Audit Pitfalls Part 2 here.


*         This isn’t a paid advertisement for Dext, and we don’t get any kickbacks from them. We really do just like them!

Friday, July 1, 2022

Do you qualify for the Fuel Tax Credit?

If you use fuel in equipment, you might benefit from the Fuel Tax Credit.





The fuel tax credit is specifically for off-road use of gasoline or diesel. The credit is $0.184 per gallon.

 

It represents a refund of highway maintenance taxes for fuel that isn’t used on roads.

 

Only fuel used for business purposes qualifies for the credit – no personal use fuel qualifies.

 

Typically, this means fuel that is used in machinery and equipment, such as lawn equipment, bulldozers, farm equipment, or boats.

 

In order to claim the credit, you must maintain a record of how many gallons of fuel are used for off-road purposes. The IRS requires records that include:

-    - The number of gallons of fuel purchased and the dates of the purchase, and the name/address of the vendor (for example, a receipt or supplier invoice)

-     - A log showing how the fuel was used (for example, a monthly log for each piece of equipment, or a daily log of total fuel use in all equipment)

 

We claim the credit on your business tax return. If you qualify, please provide your total of gallons used for off-road purposes at tax time so that we can include this credit in your tax return.