The IRS has been making it known that they’ll be increasing their review of upcoming tax returns. You don’t want to be caught on the wrong side. Doing a little due diligence can help ensure that you’ll be in the clear in case of an audit. After all, an ounce of prevention is worth a pound of cure!
Two Keys for Proving Your Deductions
How you navigate your deductions is a big point of contention with the IRS. In order to prove your deductions during an audit, you’ll typically have an auditor requiring two key pieces of documentation. First you need the receipts. Then you need your proof of payment.
Your bank statements can help fulfill that second requirement. But it’s important to realize that not just any receipt will work. It needs to be detailed enough to really prove that your purchase is what you’re claiming. It should have the company or entity’s name clearly displayed, as well as the date of purchase, the value of the activity, as well as the description.
For donations, you’ll also need your receipt to have a statement from the organization to confirm that you received no benefit in exchange for your donation to them. You’ll also want that statement to clarify that you are not retaining part ownership of your donation. If you have all of this information in order, then you’d be well on your way to having a streamlined and worry-free audit.
Other Ways to Document Tax Deductions
While receipts and proof of payment are the most critical components of proving your deductions, there are some other types of documentation that can also be helpful.
When you’re claiming mileage deductions for business, charitable, or medical miles driven, then you’ll need a mileage log. Or, as a business owner, you may need to hold on to additional financial statements to show business-related activity and expenses.
There can also be other documentation required for individuals who live in multiple states, or even multiple countries. You might need to show proof of residence throughout the year. What’s more, if you sold a home in the past year, in order to receive the capital gain exclusion, you’ll need to prove residency for two of the last five years.
In other situations, there are education credits to consider. For that, you’ll need to have proof that you actually spent money on those various qualified expenses. So once again, receipts and proof of purchase will be required. Plus, you’ll need to show that you weren’t reimbursed for those claimed expenses through grants or scholarships. All of this can be rather tricky, but fortunately, there are professionals who can help!
Need A Hand to Stay on Track? We Can Help!
There’s no doubt that facing an audit can be stressful and confusing. But if you have the appropriate records in order, then you should be able to handle it with confidence.
Of course, it never hurts to have help along the way. If you’re facing concerns or just want an extra set of eyes to stay prepared, please know that our team is here to help! You’re always welcome to reach out for a consultation or tax planning session. Just send us a message!