Of all the things that I dislike in helping taxpayers with their taxes and IRS issues is dealing with the IRS. They are a bureaucratic abyss that is difficult to navigate even for those of us who understand tax law and the process. Taxpayers are held to certain deadlines for addressing IRS letters and audits, yet the IRS usually takes months and, many times, up to a year to resolve a taxpayer issue. As a result, the taxpayer may have to hire a professional like me to represent them and resolve their problem. This costs the taxpayer money that they should not have to spend. On the flip side, the taxpayer may pay the IRS monies that are not due because of the fear in dealing with the IRS. Tax season gets me thinking on how I can help clients deal with, or avoid, issues with the IRS. First and foremost, file an accurate return.
Make sure you have all of the documents that are needed, and if you are a small business, that you have issued all of the documents required. Accuracy includes ensuring you can substantiate your deductions and adjustments. Substantiation means you have a bank or credit card record with cancelled checks or receipts. They must show the date paid or posted, the name of the recipient (business or charity), and the amount of the payment. Without these records, the IRS can disallow a deduction or adjustment the taxpayer made on their return. Statements alone are not enough proof of what you purchased or paid for. Without proper substantiation, business expenses may be treated as taxable income. For small businesses, proof of an expense includes keeping adequate, written records with sufficient evidence. Adequate records are defined by the IRS as: “You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. You should also keep documentary evidence that, together with your record, will support each element of an expense.” Keep your records for at least three years after you have filed your tax return. That is the amount of time the IRS has to audit your return – unlimited time if you committed fraud or filed a fraudulent return.
Many receipts these days fade after one year or so. It is your responsibility to keep the integrity of the information, so I recommend that you convert your documents to digital format for safekeeping. Scanners are very affordable these days. Logs and records must be kept for the substantiation of gambling winnings and losses, cash and barter transactions, mileage for any purpose, medical, volunteer, business, etc. Mileage cannot be estimated. There are inexpensive apps for iPhone and android that easily track your movements via GPS that can help you with mileage recordkeeping. Gambling logs should be kept for every session of gambling. There are apps for gamblers, as well. Donations that are deductible are gifts of cash or items to qualified organizations. Individuals and some non-profit organizations such as a Chamber of Commerce or Masonic Lodge do not qualify. Check with the organization prior to gifting to determine the deductibility of the donation. If you give business gifts in the course of your trade or business, you can deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year.
Any gift greater than $25 is not deductible for the business and becomes taxable income. Entertaining clients and employees by taking them to ball games, golf, hunting or any other venue that is entertainment related is no longer deductible for a business beginning in 2018 based on the new tax law. Business meals for clients and employees are still deductible as long as they have a business purpose and are ordinary and necessary expenses for the nature of the business. Knowing and following the Internal Revenue Code rules are very important to keep you audit-proof and minimize your issues with the IRS. The IRS website is a great option on information to help educate you as well as your tax professional. Anita Jean is an Enrolled Agent, licensed to practice at all levels of the IRS. She can be reached at 940-3653115 or 5099 US Hwy 377 S Suite 400 in Krugerville.