Most IRS audits start because the IRS believes there is something wrong with your tax return.
I mean, let’s face it, the IRS is not spending time auditing tax returns that they think are clean.
In other words, an audit starts with you behind the eight ball, presumed to have filed a return that has mistakes on it.
How do you fight that negative presumption of guilt before you even get started? One word: credibility.
Credibility in IRS audits does not come from words, but from organization.
But how do you organize you records for the auditor to gain credibility? And what if your records are incomplete?
Here are some tip to solve frequently encountered problems in preparing for your records for an IRS audit:
1. Make the auditor’s job easier. That means understanding what the auditor wants ahead of time, and giving it to him. You do not want to go through and organize that box of receipts, and neither does the IRS auditor. But somebody has to. And it is better you then the auditor. Remember, the auditor is coming in expecting the worst; try to gain credibility by slowly adjusting his preconceived expectations of you. So, put the time in so the IRS auditor does not have to. Ultimately, your preparation can give you the benefit of the doubt on judgment calls – you want those calls to go your way.
If possible, put your receipts in their own file folders. Each expense should have its own file folder – i.e., one for subcontractor labor, one for your charitable contributions, one for your home office expenses. Name each file folder for the expense it holds.
If necessary, receipts should be marked to further explain the expense it verifies. For example, if you entertained for business, mark on the receipt who you entertained, and why.
If you have a bill for services and a check showing the bill was paid, staple the check to the bill.
Add the totals of the receipts up for each expense category and provide your tabulation to the auditor.
Do away with plastic grocery bags with receipts in them. This makes for a poor presentation and takes away credibility.
Prepare this way: How would you like the records to look if you were the auditor? What would impress you?