Published on: March 8, 2016 Last modified: June 22, 2020

What Records Do You Need to Support Tax Deductions?

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    This time of year may have you thinking creatively about tax deductions. Reading the tax code too liberally can lead to an Internal Revenue Service tax audit followed by a court battle. Failing to have proper records can also lead to a later tax deficiency.

    The Service carefully reviews deductions for your home office as well as business-related travel and meal deductions. Your record-keeping practices could prove the difference if the IRS challenges your numbers down the road.

    This post will look at several creative deduction claims and the records you need to support your deductions.

    From landscaping to a swimming pool

    Some deductions require a trip to the courthouse. For example, a man who routinely met clients in his home tried to deduct the costs of landscaping. The tax court allowed part of the lawn care costs and even some money for driveway repairs.

    In another case, a taxpayer sought to write off the cost of an indoor pool as a medical expense. His doctor had ordered more exercise to treat his emphysema and the primary purpose of the pool was medical care. Costs related to heating and maintaining the pool were also deductible.

    The IRS questioned both of these deductions. The taxpayers took the fight to court and had the necessary records to prove their expenses.

    Value of record-keeping

    Two recent results from Tax Court are illustrative. In the one, a business consultant did not have convincing records to support travel, meals and entertainment expenses. The judge ruled he owed back taxes with penalties and interest. To support these types of expenses, you need to keep receipts and record the “business purpose.”

    Another judge held that a couple could deduct approximately $7,000 in mileage as a business expense. They had kept handwritten notes on index cards. These “contemporaneous records” are a gold standard when you do not have receipts.

    As a rule of thumb keep tax returns and substantiation for seven years. If the agency audits your return and questions deductions, seek the assistance of a skilled tax attorney.

    Source: Wall Street Journal, “The Truth About Tax Records: An Index Card Can Make or Break You,” Laura Saunders, Mar. 5, 2016

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