In my last column, I wrote what I hoped was an inspirational plea to get taxpayers to start tracking their income and expenses year round, and to make the effort now to get on track for 2011. In that column, I mentioned that I recommend saving receipts for seven years. My eyes were opened when the smartest woman I’ve ever met emailed me and asked, “So I’m actually supposed to save all our credit card receipts?!?”
She definitely made me realize that perhaps I have to take a step back and explain what you need to be saving! The best way to think of it is with the end in mind — the end being the dreaded IRS audit! If you are selected for audit, the IRS will randomly pick several categories to audit. For an individual they may choose charitable donations, or for a small business they may choose advertising and office supplies. They will take the balance of what you deducted and ask you to substantiate it.
How do you substantiate something? In the mind of the IRS, you need to prove both payment method and the expense itself. They believe, rightfully so, that you can come up with receipts that you didn’t actually pay for just by picking them up off the ground or borrowing them from friends. So, if you spent $100 at Office Max, you need to have a statement which shows payment method, such as the credit card statement or debit card statement showing the charge, and the expense receipt from the store. Sound tedious? You’re absolutely right, but those taxpayers who pay for everything on debit or credit card and save their receipts find that audits go quickly and painlessly.get updates, visit http://journalstar.com/news/opinion/editorial/editorial-arena-bookkeeping-change-justified/article_df996720-1b89-56d5-8727-29d78f9e2aa3.html for more details.
What if you use cash? First, I recommend that you avoid using cash altogether. But, if you feel that you must, be forewarned that if you are ever audited, the IRS will be looking at your bank statements to show ATM or other cash withdrawals to prove the payment method. If you pull out $200 per week and have receipts showing expenses of $200 per week, they will probably be satisfied.
But, if you pull out $200 of cash per year and have cash expenses of $2,000 during the year, they will jump to the conclusion that you are probably bringing in cash into your business and not reporting it. Reporting the expense side of a transaction and not the income side of a transaction has a name: fraud! Trust me, you don’t want them going down that road!