Every year we prepared our clients tax return from information he supplied us with. He owns his own business, which is in the service industry and which he conducts as a sole proprietor. Even though his yearly revenue varies, his expenses remain fairly constant year over year. The IRS decided to audit his 2012 business expenses.
Unfortunately, due to moving into a new home he didn’t keep any receipts. After explaining to the auditor what occurred, he requested that our client write a detailed explanation of the services rendered and the associated expenses. Even though this was done the IRS disallowed 100% of his expenses because he could not substantiate any of his expenses.
We requested that to the best of his knowledge he recreate a calendar of which clients he visited and the miles driven for the day. Another problem he had is that he utilizes one bank account for his business and personal life, in addition the bank statements for that year were no longer online he had to order them. As he mainly uses his debit card to pay for everything he had to go through each statement and highlight which costs were for business and what was purchased.
Once that was accomplished he dropped off a huge mess on my desk.
I totaled the miles he drove each week and each month. I summarized it into a format that the IRS was able to verify with the calendar. Next we had to summarize the bank statements by month and by expense. Once again we put it into a format so that the IRS could easily trace each expense back to the bank statements.
Our objective was to give the IRS agent the information in an easily readable and verifiable format. We affect we wanted to give the auditor the necessary information in a format that he could tie out to the tax return.
Eventually, the IRS issued a no change which saved our client $20,000. The moral of this story… keep receipts for all your business expenses and to make the auditors’ job as easy as possible. If you always do this you won’t have to fear an IRS audit.