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What are Adequate Records or Sufficient Evidence?

IRS regulations are quite specific and put the burden squarely on you to maintain adequate records which may take the following forms: account books, diaries, logs, trip sheets, expense reports, statements of witnesses or similar specific records, that are "made at or near the time of the expenditure." These records must be supported by sufficient documentary evidence which together constitute clear proof of each element of an expenditure for travel, entertainment, and gifts. Without adequate substantiation of expenses, travel and entertainment expenses may be disallowed in their entirety. Whereas the IRS may allow a reasonable amount for other types of unsubstantiated deductions, they are prohibited from doing so with travel and entertainment expenses.

During the debate the House and Senate wrestled with this issue quite a bit. The House Ways and Means Committee attempted to impose an alternate test of "sufficient written evidence corroborating the taxpayer's own statement." When the House and Senate versions went to conference to resolve their differences, the written test requirement was removed, but the Committee Report states:

Oral evidence, such as oral testimony from a disinterested, unrelated party describing the taxpayer's activities, may be of sufficient probative value that it should not be automatically excluded from consideration under Section 274(d).

The Committee report further points out that:

Different types of evidence have different degrees of probative value. The conferees believe that oral evidence alone has considerably less probative value than written evidence. In addition, the conferees believe that the probative value of written evidence is greater the close in time it relates to the expenditure. Thus, written evidence arising at or near the time of the expenditure, absent unusual circumstances, has much more probative value than evidence created later, such as written evidence first prepared for audit or court.

This means that Congress didn't have the nerve to require you to maintain written "contemporaneous" records, but they want you to know that it is in your best interests to keep good written records made "the closer in time it relates to the expenditure." (Sounds a bit like the definition of "contemporaneous" doesn't it?)

The Committee Report points out that they "specifically approve the types of substantiation that were required under prior law, and consider the long-standing Treasury regulations on recordkeeping... to reflect accurately their intent as to the substantiation that taxpayers are required to maintain."

Next Section: IRS Regulations on Adequate Records for Travel Entertainment & Expenses

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© 1986, 1998 to 2002, Jack Warren Wade, Jr.