A Fun Little Tax Quiz on IRS Audit of Schedule C

Having been through several audits where the IRS has denied business deductions because of lack of receipts. You need 2 things to prove a deduction:

1. a receipt showing what was purchased, and proof of payment, 
2. Without both, the IRS has denied. 

• For meals & entertainment (M&E) expense you need documentation to prove it was a necessary business expense. You should keep a receipt with the name of the person you met with and the nature of the business discussed (who, what, where, when & why). 
• To back up gas expense you need to keep a mileage log. Another document the client should keep, (even if using the mileage method for automobile expense) are records of auto repairs. Auto repair bills have the odometer readings - this helps justify any mileage claimed. IRS will look to disallow auto mileage without backup receipts.
• The IRS will look to disallow any business expense debited on a bank statement without having the applicable back-up receipt. 
• If an audit adjustment is 10% or more or $5,000, there is a 20% accuracy related negligence penalty.
• A Fun Little Tax Quiz on IRS Audit of Schedule C  
• Assume that you are one of the almost 4% who is going to have your Schedule C business expenses audited by the IRS.  
• You had the misfortune of being chosen through random selection (50% of audits are random selections; the other 50% are based on test scores).  The three lines that contain the expenses that the IRS is most likely to audit are: 
1. Car & truck expenses on line 9,  
2. Travel on line 24(a) and 
3. Meals & Entertainment on line 24(b). 

• The reason the IRS targets these lines is simple: The law requires specific records for these expenses. If you don't have properly kept records, you get no deductions. 

• For Car & Truck expense, you must have a log that proves your business-mile percentage. Regardless of how you deduct your vehicle, you must have a supporting mileage log. 
1. If you use the actual expense method, you need the mileage log.
2. If you use the IRS standard mileage rate, you need the mileage log.
3. In addition to the mileage log, if you are using the actual expense method, you must have a receipt for any car or truck expense of $75 or more. 

• For Travel expense during the travel, you need both:

1. receipts for expenses of $75 or more, and
2. entries for each business day saying where you were and listing your business reason(s) for being there that day. 

• For Meals & Entertainment expense, including entertainment involving meals, you need to:
1. record the name or names of the person(s) you entertained,
2. record the business reason for the entertainment,
3. record the place and type of entertainment, and
4. keep receipts for any entertainment that costs $75 or more. 

Regardless of the system you use, make sure that you write down, on a timely basis, the answers to the documentation requirements. You may not record this information later. The law requires timely recording, which the IRS says is any time within one week.

• Do you think, Bill & Melinda Gates, Microsoft® founder, are going to pay an extra $10 million on their tax return if they don't have to? They'd pay their tax advisor $2 million to get around it, and so should you!