This is a question I get asked all the time: Why do I have to keep all these receipts? There’s one main reason: If you want to deduct it, you need proof. In the event that you’re audited, the IRS requires full documentation. Most people don’t understand that, when under audit, one of the rules is that the burden of proof is always on the taxpayer to keep adequate documentation.
You may now be asking the second most popular question I hear all the time: Isn’t my credit card statement enough? In a word, NO. The credit card or debit card statement itself is not adequate documentation. The IRS can disallow the entire amount of the deduction if it is not accompanied by a receipt.
Let’s use an example. I had a client who donated to his church in cash. He had a letter from the church that said that he had donated a specific amount, so we added it to the tax return. He was subsequently audited, and although we had the letter, the auditor said that they wanted additional substantiation. We argued that the third-party letter was sufficient, but the auditor replied that they have the right to ask for more substantial proof, which could include the bank statements or other documentation that shows the client provided the cash donation to the church. We eventually lost the deduction because we were unable to substantiate it to the IRS’ requirements.
Cash is very difficult to prove, but if he’d had the bank statements to back up his claims, that would have helped greatly. In this client’s case, he not only hadn’t kept adequate records, he’d also not been entirely truthful about his financial status and his actual income. We were unable to match what he claimed the donations were with any transactions in his bank statements. He deservedly lost the deduction.
Although a person’s bank statement shows transactions, the IRS will always want additional records, like a “statement from the vendor”—also known as a receipt. They have the right to ask you for that, and they most definitely will.
Why do they do this? It’s simple—let’s say you bought something at Staples, and that shows on your credit card receipt. That’s a business expense, right? Yes and no. Not if you bought school supplies for your daughter, bought packing supplies to move your home or picked up some snacks at the register. The IRS needs you to prove that it was a legitimate business expense that you are making, and therefore a valid deduction on your return.
This comes into play a lot in the building industry, in the cases of such businesses as contractors, interior designers, roofers, to name just a few. In these cases, they need to specify which house the expense was attributed to and why.
I had a contractor client a few years back who came to me for an audit. The IRS wanted the substantiation for the purchase of materials on a property he was working on, and unfortunately, I had to turn down the job. The contractor had already spoken to the auditor and gave him information that was not in his best interest to give him, which put both of us at a disadvantage for the audit. It’s always best to talk to an accountant before you talk to the IRS.
Do you have questions about what will be required at an audit? Are you unsure of what receipts to keep and which to throw away? Do you have all of your receipts in a box in the closet? Then please call Simons Accountancy now on (714) 637-4552 for a consultation how we can help with your tax preparation and bookkeeping, or use our online form.