Be A Tax Document Hoarder

Carolyn Lee, Abkin Law

However mundane, documents are key to reducing your firm’s taxable income. Be ready to claim every allowable expense at tax time, and respond to a tax inquiry later.

Why be a hoarder

First, taxpayers have the burden of proving deductions are correct. Some expenses are not deductible without substantiation, e.g., travel and entertainment. Other expenses may be estimated, but only when there are documents underpinning the estimate. Second, you will benefit most from allowable business deductions, because you will know what all your expenses were. Third, if your firm’s deductions are questioned, substantiation will be available. You may be able to handle the inquiry, saving CPA or tax legal fees.

What to hoard

Keep everything – contemporaneously. This may be anathema to a paperless office but it isn’t difficult. It takes the same amount of effort to toss a receipt in a redwell as in the recycling bin. (Annotate the receipt to describe the expense.)

Travel, entertainment, and gift deductions will be completely denied without substantiation. Contemp-oraneous records specifying date, business purpose, location, miles traveled, and cost are essential. Keep a log in the car. Maintain a desk calendar with detailed notes. Update at least weekly. A time lapse between the expense and the record entry creates doubt as to credibility and accuracy. Print electronic calendars for the firm’s tax file. Resist saving substantiation only on your phone, which may not be your phone when you are audited. The cloud storage promoted as eternal and eternally secure will have been hacked or corrupted. Keep the source documentation even after your bookkeeper enters the expense data into QuickBooks. Those reports alone will not be enough. Download paper copies of your practice’s monthly bank and credit card statements. The IRS and Tax Court disdain reconstructed records, and give them little weight.

Your return preparer can coach you about expenses that may reduce your firm’s taxable income. Any tax controversy attorney can address the cost of inadequate record keeping. Should you need to call tax counsel, open with these endearing – and fee-minimizing – words: My firm has records.


Carolyn Lee

Carolyn Lee

About the author:

Carolyn Lee practices federal and state tax controversy with Abkin Law.  Lee is active with the Solo and Small Firm Section and the Taxation Section.  She is a member of the Board of Directors of the Justice & Diversity Center, and volunteers with the JDC Low Income Tax Clinic.