ReAnn Rothwell’s Money Saving Ideas, Tax & Organizing Tips

Every year the IRS audits almost 1.66 million American taxpayers. Keep in mind that, even though the audit itself is not an automatic indication of guilt, if the IRS calls you in, it expects to come out of it with at least some additional money … your money.  

What are some of the mistakes folks have made?

MISTAKE #1: “NO RECEIPT, NO DEDUCTION”

You can lose deductions simply because you do not have the proper documentation to prove the deductions. What do I mean by “documentation”?

Well, if the IRS requires you to substantiate a deduction on your tax return, you must be able to provide written proof that the deduction really happened. The easiest way to
prove a deduction is to hang on to:

a) The receipt or invoice, and 

b) Proof of payment, which can be a canceled check, cash
receipt, or credit card statement. 

Take Mr. Smith for example. He reported numerous deductions for which he simply
did not have the documentation. No receipts, no canceled checks, no nothing. Turns out that Mr. Smith was a “cash person”. Do you know what I mean by a “cash person”?
Maybe you know what kind of person I am talking about – He hardly ever wrote a check in his life, just carried a wad of cash around in his pocket. He paid for everything with cash, and never kept hardly any of his receipts. Every year he would just sit down with his wife and “remember” how much he spent on different things. No way to prove any of this, of course. He just had a “feel” for how
much cash he had spent, and he had run his business for so many years that he just “knew” how much it cost to purchase certain things. 

This is the kind of taxpayer that the IRS loves! It really is true — if you cannot prove that you paid for something (with receipts, invoices, canceled checks, etc.), then you run the risk of losing that deduction in the event of an audit. 

One of the most common questions I am asked by clients is this: “I know I paid for something, but I don’t have a receipt. Should I still report the deduction?” 

My response is usually this: “You only need a receipt if you get audited!” 
Think about that for a minute! At first, many clients do not know if I am joking or not. 

Well, I do make that comment with my tongue planted firmly in cheek, but there really is a lot of truth to it. If you do not have the documentation to prove a deduction, you can
still report the deduction (if you want), because you only have to prove the deduction if you are audited. 

However, if you are audited, knowing that there are undocumented deductions on the return, be prepared to lose the deduction. (If you are audited, the taxman will most likely focus on your auto, travel and entertainment deductions.)

MISTAKE #2: BOGUS DEDUCTIONS

It turns out that sometimes clients are not always completely honest about some deductions. Some deductions simply are not real deductions. IE Alimony is not the same as child support. Paying your ex-wife’s phone bill is not a business expense. Deducting the value of your own time that you spent fixing up a rental house. (You can never legitimately deduct the value of your time for work you did. You have to actually pay someone else to do the labor. )

If you ever get a letter from the IRS that demands additional information, you will have nothing to worry about if you can properly document your deductions and assuming you
have no bogus deductions!