Fighting The IRS: It’s Fun and Easier Than You Think
The surest way to win any conflict is to prepare for it long before it happens. Boxers train for weeks before a bout; the military simulates terrain, tactics, and variables constantly; we paint and repair our house to prevent problems in the winter.
Make no mistake about it, the IRS is an adversary organization and its people are interested in winning, at your expense. However, they are bound by rules, and knowing how to use these rules to protect yourself is your best defense
Most of us do not take full advantage of the benefits in the tax code. We are too defensive, too afraid of the IRS. Several areas where we could be more aggressive, but aren’t are areas like Unreimbursed Employee Expenses (Form 2106), Schedule C (for accounting for outside business income and expenses), charitable deductions, and theft or casualty losses. The key to winning, if the IRS comes is DOCUMENTATION. Prepare for the fight before it happens.
First the good news. Although the above areas are more likely to draw an exam, the chances are very low of being examined. The deduction not taken is lost forever. The odds are well on your side, not the IRS. Sound good?
Now, how do we prepare?
Keep all documents you used to prepare your return for at least 3 three years after you file the return. There is nothing more unnerving to receive the intimidating IRS notice, and know your evidence was tossed out. Keep your records well labeled and accessible.
The documents you should retain are related to your return and then some more. Keep all bank statements, deposit tickets (itemizing checks deposited), credit card statements and the associated receipts. A credit card statement without the paper receipt is not acceptable as deductable in an exam. Be sure to keep oil change and repair receipts, and have your mechanic enter the odometer reading. Many of us use our vehicles and the 56.5 cents a mile deduction can really add up. We all keep day planners or some sort of diaries for our business activity. Put more detail, like client, place, and company contacted, and keep the record by day to support your deductions. The contemporaneous diary will bring the IRS agents to their knees. Very few people keep them, or keep them properly.
If you donate property to a charity, be sure to make an itemized list and have it signed by the employee of the charity. The little slip they give you isn’t worth the paper on which it’s written.
If you are one of our road warriors, keeping receipts can reap you big bucks when you file your return, and allow you to keep it if examined. Hotel, car rental, airline, gas for rental cars and a
slew of miscellaneous items are deductable when you are on the road. Meals on the road, especially if you are hosting should be memorialized with the receipt showing who you hosted and their affiliation. Every time you reach for your wallet, it is probably deductable. Keep the receipt to keep it deductable, and to maintain an accurate record to report on your return.
Everyone has potential deductibility for some surprising items. Keep your cell phone, computer access and all computer related receipts. Any purchase of office or business supplies can be deductable.
The tax effects of gambling are a recurring issue among our colleagues. No one wants to be reminded of losing, but documenting your losses makes for protecting your winnings from the tax man. Get a gaming card from the casino or keep your losing tickets in you annual tax file. Better yet, if you want to gamble, gamble on games where they don’t give out 1099’s if you win big. Many states are taxing gambling winnings, but refusing to allow even properly documented losses to be netted against the winnings. Strange, but true.
Intimidated by the suggestions? That’s what the IRS loves. Intimidation. Keep your file in a discrete, but accessible area. You do not have to do constant bookkeeping to maintain the system. Also, many of us have the capacity on our cell phones to take copies and store them there. Totally acceptable and recommended if you hate holding the paper. The documents must be able to be printed on paper when needed.
Don’t let them beat you before you start fighting. I can assure you of the tremendous satisfaction you will feel when you watch the IRS examiner deflate as you present the mountain of evidence proving that they wasted everyone’s time.
