As a good portion of tax filings have been completed, the question often comes up about what to do with all of the paperwork that’s left over? Well first and foremost, do not throw your information away. The best way of doing this is finding good scanner, making the time to get your information scanned in because receipts do fade often, and information can be easily lost. However, if a situation arises though that you’ve lost your information, here’s some helpful information.
The IRS tax code requires that a taxpayer keep adequate books and records, regardless if you’re a business or an individual. However something that was established by the tax court system was what was called the Cohan rule. This rule allows deductions even without adequate records if the taxpayer presents sufficient evidence to establish a rational basis for making an estimate of the deductions [Cohan v. Commissioner, 39 F 2d 540 (2d Cir. 1930)].
An example of the rule in action: A sole proprietor who was a nurse practitioner and provided expert testimony in medical lawsuits, kept very poor records, retained only canceled checks for some of their expenses and nothing else. Well, one of their witnesses in court was a contractor who estimated both the amount they paid her and other expenses she knew they had paid to run the business, including insurance, dues and memberships, shipping, books and supplies.
In the end, the tax court ruled partially for the sole proprietor. Because of the Cohan rule, it required the additional evidence be credible and sufficiently detailed both to verify entitlement to a deduction and to make a reasonable estimate of how much to deduct. The Tax Court found the witness to be independent and credible. Since the witness recalled insufficient details of expenses that the IRS had disallowed, the court allowed the deductions.
Now exceptions to the rule, include travel, automobile, computer, and other expenses for which specific detailed written records are required. Situations where this can be a hindrance to the tax payer, is if they have no records substantiating mileage between contracting jobs.
There are numerous avenues of storing this type of detailed information, because the normal look back period for an audit can be up to 3 years; however, the IRS can go back further should they feel that income has not been adequately reported. Also should you file late, the clock starts ticking on the date that it was filed with the IRS – not the actual year of the filing. So if you file a year later than expected, then your 3 years starts with the date it was accepted to the IRS.
Again, make sure that everything is scanned, saved in multiple locations in order to help prevent potential loss should an issue arise later, and think about the amount of space you’ll be saving in the long run.
About Our Show Advisor: Dwayne Briscoe is the founder and owner of Bookkeeping-Results, LLC. Dwayne began his company in January 2007, based on the foundation to educate small business owners and bookkeepers who use QuickBooks®. Working as a full-charge bookkeeper and trainer in a variety of industries for over 15+ years, he is a certified Pro Advisor with 5 certifications, including Enterprise Solutions and Point of Sale. He is also an instructor at Brazosport College in Lake Jackson, where he teaches basic accounting, QuickBooks®, and basic payroll, along with hosting his own private classes.
Bookkeeping-Results, LLC has focused more on quality and not quantity for their clients, by paying attention to the details. Through regular continuing education participation, as well as exploring additional ways of “thinking outside of the box” to help expand people’s knowledge of their own financial well being, it’s important to focus on not only saving the client money but also making the client money.