How to Bullet Proof your Tax Deductions for an IRS Audit

In a previous blog, I mentioned that as a Real Estate Professional, you file Schedule C, the Tax Form that is the form most audited by the IRS.  The IRS has found that Schedule C’s contain a large number of errors compared to other forms and finds that they are very successful with audit changes to the returns, and able to recover a higher amount of additional taxes to the taxpayer that is audited.

If you are one of those unlucky individuals that get an audit invitation in the mail, what do you need to do to make sure that you have documented your return properly?  We’ve already discussed that you don’t want to represent yourself unless you’re an attorney or experienced in handling audits.  In addition, you need to have an effective bookkeeping system and have your records organized in a manner that the IRS can give you the deductions you want. 

What is required to support a deduction?  First, of all the deduction must be ordinary and necessary.  It must be ordinary in your trade or business and necessary to run your business to earn a profit.  In addition, each deduction should include the three “Ps” as support:

1. A Purchase document – invoice or receipt reflecting purchase
2. A Payment document – Bank statement, cancelled check, credit card statement, etc… showing payment, and
3. Documenting the Business Purpose – What was the business purpose of this purchase? This is where my clients typically run into problems when an audit occurs 3 years later.

To be ready in an audit, we strongly recommend having a separate business and credit card account (you don’t want to give the IRS your personal statements, do you?), a bookkeeping system (preferable using bookkeeping software), and updating your records promptly.  If you follow these rules, you should have a much more successful outcome and keeping more of your hard earned money.

Need a Tax Professional to Team up With?

If you are a Realtor or other Small Business owner, who needs professional help with your taxes, keeping your books properly, or dealing with any IRS issues, give me a call at (972) 821-1991 or send me an email at bob@jablonskyandassociates.com.  Learn more about us at https://jablonskyandassociates.com/real-estate/.