As many of you may or may not know, the burden of proof is traditionally on the taxpayer to prove the legitimacy of a deduction they've claimed. Basically, you are guilty until proven innocent. In my practice I frequently get asked by my clients, "what is a valid source of evidence for the IRS to accept my deduction?"
Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you are billed for additional tax. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.
Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:
- Credit card and other receipts
- Mileage logs
- Canceled, imaged or substitute checks or any other proof of payment
- Any other records to support deductions or credits you claim on your return
Mileage logs are the most highly contested area of unreimbursed business expenses. Maintaining an accurate and timely record of these expenses is vital to claiming the deduction (if challenged by the IRS). The 4 biggest elements to include in your log are: amount, time, place and business purpose. And, as noted below, it's vital to timely record these elements.
IRS says in Pub 463 you should "record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence. A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. You do not need to write down the elements of every expense on the day of the expense. If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record."
The US Tax Court tells us that if you don't have a travel record or notebook in your car to write down business travel expenses as they occur, even if you can reconstruct them after the fact, they won't be satisfactory for the IRS.
Download a mileage log that you can print and keep in your vehicle at the end of this post.
For more information, see IRS Publication 552 (recordkeeping for individuals), IRS Publication 583 (starting a business and keeping records), IRS Publication 463 (travel, entertainment, gift, and car expenses), or contact your local Liberty Tax office to speak with a tax preparer.