Audit proof your deductions

The best defense for what to do when audited on audits of an IRS Tax Return AuditThe IRS is being very public about increasing the review of tax returns. The best defense for you is to prepare for an audit before it happens. Here are some suggestions:

The best audit defense

To prove your deduction, most auditors look for two key documents: receipts and proof of payment.

  1. Receipts. This is the first of the key documents you must have to validate a deduction. The receipt should clearly show the company or entity, the date, the value of the activity, and a clear description of the activity. In the case of donations, the receipt should also have a statement that confirms you received no benefit in return for your donation. It should also state that you are not retaining partial ownership of the donation.
  2. Proof of payment. The second key document to defend your deduction is proof of payment. You will need a canceled check, a bank statement or credit card receipt, and a related statement.

Your proof of payment and receipts should generally match the date of the activity. The IRS is quick to dismiss receipts that are obtained after the fact. A good rule of thumb is to ensure you have receipts and proof of payment from the time of the activity. If not, at least ensure you have receipts and payment proof within the tax year the deduction is taken.

Additional documentation to keep on hand

In addition to the above, certain deductions require additional documentation. Here are the most common:

  • Mileage logs. You must show properly maintained mileage logs for business miles, charitable miles, and any medical mile deductions.
  • Business records. You will need financial statements for any business-related activity, along with supporting documentation.
  • Residency. If you live in multiple states or multiple countries, you may have to prove where you lived during the year. In addition, to receive the capital gain exclusion for a home sale, you must prove residency for two of the last five years. So, keep records that show your physical presence to support your tax filings.
  • Non-reimbursement. If you claim any education credits, you will need to show that you actually spent money on qualified expenses at qualified institutions. You must also show that your claimed expenses were not reimbursed through scholarships or grants.

Defending your tax return during an audit can seem daunting. Fortunately, with some thoughtful planning, an audit can become a no-change audit. Contact our RRBB advisors for more information or if you have questions.


Get free tax planning and financial advice