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Q.What will I need to bring to a tax audit?
A.If you are audited you should expect to bring the following documents:
- Bank Statements, Canceled Checks and Receipts from both your personal and business accounts. To be prepared, you want to save all business-related canceled checks, invoices, sales slips, cash receipts, etc.
- Electronic Records. As many business expenses are charged on credit or debit cards (Visa, MasterCard, Amex and Discover), your credit card statements are considered proof of payment so long as they show the name, date, amount and address of the payee. However, since charges and statements do not show the business nature of the expense, you cannot rely on them as your only records.
- Books and Records. The tax code does not require small businesses to keep a formal set of books, so do not let an auditor tell you otherwise. If you keep records with only a check book and cash register tapes, that is sufficient. But if you do maintain a formal set of books such as ledgers, you are required to produce them. If your data is on computer, the auditor will want to see a printout.
- Appointment Books, Logs and Diaries. Many businesses that offer services typically track their activities and expenses using calendars, appointment books and logs. An entry in such an item may help justify an expense to an auditor as long as it appears to be reasonable. You must also keep special records of usage for certain equipment called "listed property." Listed property is those things such as cars, computers and cellular phones that are used for both business and personal purposes. If you have not kept usage records of listed property, reconstruct them by memory or reference to projects that you worked on during the year.
- Auto Records. As mentioned above, a car can be "listed property" if it's used for both business and personal purposes. So business use of your vehicle will require detailed records showing when the vehicle was used for business purposes. Although not required by the tax code, a log is probably the best method for tracking business related mileage. The business owner should also keep all gas and repair receipts in an orderly fashion with notations of trips showing how the car was used for business.
- Travel and Entertainment Records. By law, out-of-town business travel and entertainment expenses require greater record keeping than most other expenses. You must maintain both a receipt and a written record of the specific business purpose of the travel and/or entertainment expense. (IRC § 267.). A good method for documenting the specific business purpose is either to note it on the face or back of the receipt and to maintain an entry log noting each time you incur a business expense, and the reason.
- Expenses for Renting or Buying Property. To prove business rental expenses, bring in a copy of your lease, or if you own the property or equipment, bring in the purchase contract. This establishes grounds for claiming these expenses as well as a beginning tax basis of the property, if you claim depreciation expenses.
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