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Adequate Records For the IRS

Tax and Financial News

September 1999

Adequate Records For the IRS

The burden of proof still remains on the taxpayer so keeping good records is the smart way to avoid pitfalls. Most audits of taxpayers are still substantiation audits and the Internal Revenue Service Code still requires all taxpayers to keep adequate books and records to substantiate every item on their tax return. It is still general practice for the IRS to require a taxpayer to bring in all of their records for review. If needed, the IRS can summons a taxpayer's records if the taxpayer fails to comply with the request. A negligence penalty of 20% of the amount of the tax attributable can be imposed if you fail to maintain adequate records.

Shifting the Burden of Proof

Certain conditions apply in order to shift the burden of proof to the IRS if your audit goes to court. The first condition, of course, is that the taxpayer maintain all records required by the Internal Revenue Code. Secondly, the taxpayer must produce those records to the IRS agent at the time of the audit.

Agents are placing greater emphasis on record production at the audit level since they are subject to later review and criticism if the taxpayer is successful at getting the burden of proof shifted in a court case. Their best defense at any attempt to shift the burden is to establish that the taxpayer did not provide adequate records at the audit. The tricky part is that the IRS never clearly defines what "adequate records" are.

The IRS Code makes the broad requirement that the taxpayer keep whatever records are necessary to substantiate each item on the tax return. As a general rule, you should keep original documentation to show who, what, when, why and how much. Checks, bills, invoices and all third-party documents should be kept. Detailed journals and ledgers are usually a good sign of adequate record keeping. Maintaining good records will greatly increase your chances of prevailing in an IRS tax audit. The IRS may be friendlier but do not be fooled into thinking that anything will be different when it comes to substantiating your tax returns.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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