Step 1

Keeping Proper Records for an IRS Audit

During 1985 "recordkeeping hype" reached new heights. The Tax Reform Act of 1984 required that "contemporaneous" records be maintained to substantiate tax deductions and credits claimed for traveling expenses, entertainment, gifts, and business use of automobiles, other vehicles, and computers. Then the IRS issued regulations that almost everyone in the world opposed. Many taxpayers claimed they would spend more time complying with the law than they would in making a living.

The debate heated up, forcing Congress to repeal the "contemporaneous" provision of the law as though never enacted, and reinstate the previous standards of recordkeeping. With all the confusion surrounding the debate and the repeal, people are more perplexed than ever about proper recordkeeping.

In a nutshell, nothing has changed since before the Tax Reform Act of 1984. For 1985, the recordkeeping requirement was the same as for 1984, while for 1986 and thereafter there is a slight change.

Internal Revenue Code Section 6001 still requires every person liable for any tax to keep certain records as required by the IRS. In turn, IRS regulations require that any person required to file an income tax return must keep "such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return."

In addition, Code Section 7203 relating to willful failure to file also includes willful failure to "keep any records" as a misdemeanor with possible fines up to $25,000, and imprisonment up to one year with costs of prosecution. Focusing on just the records provision, Code Section 7203 reads in part:

Any person required under this title... or required by this title or by regulations made under authority thereof to... keep any records... who willfully fails to... keep such records... at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor.

AUDIT PROOFER'S STRATEGY

You must keep adequate records to support your income and your deductions, as required by law. It is your loss should you fail to do so.

1. Why You Should Maintain Adequate Records
   
2. What Records are Necessary?
   
3. Travel & Entertainment Expense Records
   
4. What Are Adequate Records or Sufficient Evidence
   
5. IRS Regulations on Adequate Records for Travel & Entertainment Expenses
   
6. Special Substantiation Rules for 1986
   
7. Exhibit 1-X: Substantiating Business-Related Expense
   
8. Recordkeeping By Employees
   
9. Exhibit 1-1: Recordkeeping For Individuals

Or, move on to Step 2: Getting Correct Information From The IRS (and others)

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