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.