ongress has passed Turns out that Mr. Jones lost the
legislation that is audit and ended up owing the IRS
supposed to result in a a significant amount of money --
more "sensitive" Internal Revenue the additional tax, plus penalty
Service. You know, not such a and interest for late payment of
lean, mean, tax-collecting that tax. Why did Mr. Jones' lose
machine. the audit? Mr. Jones made two
"classic" taxpayer mistakes:
Hmmm . . . . What do you think?
MISTAKE #1: "NO RECEIPT, NO
A few months ago, one of my DEDUCTION"
clients (let's call him Mr.
Jones) got one of those IRS "love Mr. Jones lost several deductions
letters" requesting more simply because he didn't have the
information about his return, and proper documentation to prove the
the IRS wanted to meet with Mr. deductions.
Jones in person to discuss the
situation. What do I mean by
"documentation"?
Mr. Jones (a local small business
owner) was required to show up at Well, if the IRS requires you to
the local IRS office with all his substantiate a deduction on your
records. The IRS was questioning tax return, you must be able to
the legitimacy of several provide written proof that the
business deductions -- and so the deduction really happened. The
IRS was doing what it is allowed easiest way to prove a deduction
by law to do -- demand that the is to hang on to:
taxpayer prove that those
deductions were valid. a) The receipt or invoice, and
b) Proof of payment, which can be taxpayer that the IRS loves! It
a canceled check, cash receipt, really is true -- if you can't
or credit card statement. prove that you paid for something
(with receipts, invoices,
Mr. Jones reported numerous canceled checks, etc.), then you
deductions for which he simply run the risk of losing that
didn't have the documentation. No deduction in the event of an
receipts, no canceled checks, no audit.
nothing. Turns out that Mr. Jones
was one of those "cash guys". One of the most common questions
Maybe you know what kind of guy I am asked by clients is this: "I
I'm talking about -- he never know I paid for something, but I
wrote a check in his life, just don't have a receipt. Should I
carried a wad of cash around in still report the deduction."
his pocket. He paid for
everything with cash, and never My response is usually this: "You
kept any of his receipts. only need a receipt if you get
audited."
Every year he'd sit down with his
wife and "remember" how much he At first, people don't know if I
spent on different things. No way am joking or not. Well, I do make
to prove any of this, of course. that comment with my tongue
He just had a "feel" for how much planted firmly in cheek, but
cash he had spent, and he had run there really is a lot of truth to
his business for so many years it. If you don't have the
that he just "knew" how much it documentation to prove a
cost to purchase certain things. deduction, you can still report
the deduction (if you want),
because you only have to prove
Well, this is the kind of the deduction if you get audited.
someone else to do the work that
he did himself, and then he would
But if you do get audited, report that amount as a
knowing that there are deduction, even though he didn't
undocumented deductions on the actually pay anybody to do the
return, be prepared to lose the work.
deduction. Fair enough?
In other words, Mr. Jones
And here's the other major deducted the value of his time --
mistake that Mr. Jones made: which is non-deductible.
MISTAKE #2: BOGUS DEDUCTIONS This is an important point -- you
can never legitimately deduct the
It turns out that Mr. Jones value of your time for work you
wasn't completely honest with me did. You have to actually pay
about some of his deductions. He someone else to do the labor.
reported deductions that simply
were not real deductions. Here's If you ever get a letter from the
one example: Mr. Jones owned IRS demanding additional
several rental houses. These information, you'll have nothing
rental houses, of course, to worry about if you do exactly
required maintenance and repair the opposite of what Mr. Jones
work. Many times Mr. Jones would did. If you can properly document
do the work himself rather than your deductions and assuming you
pay someone else to do the work. have no bogus information, you'll
pass the audit with flying
colors.
Well, Mr. Jones would estimate
what he would have had to pay
About the Author:
Wayne M. Davies is author of 3 tax-slashing eBooks for small business owners and the self-employed. For a free copy of Wayne's 25-page report, "How To Instantly Double Your Deductions" visit http://www.YouSaveOnTaxes.com
