Step 3-1

The First Aspect: Correct Documentation

It's not too difficult to save every scrap of paper or receipt, but it's a whole different thing to save the correct documentation that will justify your deductions and expenses. The correct documentation is what the IRS says is correct! And what the IRS says is correct is, for the most part, what you are going to need when you are audited.

The IRS has never published the list of proof taxpayers need to substantiate their deductions. Unless a taxpayer got an audit invitation letter, with a notice requesting the correct documentation, he never knew what to expect. Even most tax practitioners have had to rely on their experience with the IRS to advise their clients what documentation was needed. And until now, no one has ever published the complete list of proof demanded by the IRS.

Turn to Exhibit 3-1. This exhibit is a compilation of the documentation that the IRS requests whenever it is challenging particular items on the tax return. Study this exhibit carefully! It will tell you what to save now so that next year, when you prepare this year's tax return your will have all the proof you need.

Realize how valuable this information can be to you. By thinking audit-proofing in all your financial transactions, and knowing what documents must be saved, you are well on your way to cutting your tax liability in ways you never dared to before, especially if you were afraid to take a deduction for expense items you weren't sure you could prove.

Ask yourself these questions. Have you been:

• Saving your itemized receipts for drugs and medicine that you got from you pharmacist, or have you been expecting you canceled checks to be sufficient?
• Claiming an exemption for a dependent who does not live with you, but haven't been saving receipts to verify amounts you spent for the dependent's support?
• Making cash contributions to qualified charitable organizations and neglecting to obtain receipts?
• Making trips to your doctor, but failing to keep a log of the mileage?
• Given a statement from your employer that your expenses for uniforms, equipment, and/or tools were required? Have you been saving receipts for such expenditures?
• Retaining copies of expense vouchers for employee business expenses you claim from your employer?
• Making records and retaining receipts related to your entertainment expenses that show such information as the names and business relationships of the persons entertained, purpose of the entertainment, place where the entertainment took place, dates, amounts, etc.?
• The fact is most people don't keep this information because, until they are audited, they don't know it's required. Without the proper supporting documentation, or receipts, the IRS will disallow the deductions, resulting in a bill for more tax. More taxes translates into out-of-pocket dollars.

AUDIT-PROOFER'S STRATEGY RULE

• Use Exhibit 3-1 as a checklist. Make a New Year's resolution to think audit-proofing and make it a habit to save, save, save receipts, or any other required documentation.
• As you go through the checklist, pay particular attention to the categories that pertain to your situation. If you have not been collecting the essential information, make a commitment to yourself to begin.
• Refer to this exhibit often. Put a notation in your appointment calendar, right now, on the first Monday of each month to: Read IRS proofsheet in audit-proofing book. By rereading this section every month you will begin to consider the tax ramifications of all your financial affairs during the year, rather than just on April 15th, when it's too late.

Next Step: The Second Aspect: Correct Information

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