Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

 Paper trail provides defense against IRS

- by Alan Duvall 

Published in Dayton Daily News  July 8, 2007 

“Look me straight in the eye for proof.”  -Def Leppard 

Careful documentation is the ultimate defensive barricade against menacing legions of IRS agents.  Possess adequate documentation and the burden of proof is shifted to the IRS when challenging tax benefits.  No evidence and taxpayer defenses are severely compromised.

In the mid-1980’s, Congress enacted large tax increases and attempted to legislate rules completely eliminating any possibility of business auto deductions in the absence of a contemporaneous mileage log.  A taxpayer revolt erupted – the mileage log requirement was quickly repealed even though the tax increases prevailed – proving once again politicians can raise taxes but not paperwork. 

Today, lacking supporting proof, taxpayers may still use estimation techniques to justify many forms of deductions.  But this imprecise path is perilous and outcomes difficult to forecast - literally your guess versus the IRS. 

Statutes dictate business meals and entertainment deductions may not be deducted at all in the absence of adequate supporting evidence.  And documentation rules for charitable contributions have been enhanced recently as well. 

The terms of written contracts between parties will generally be respected by the IRS since conditions which tax-aid one party typically costs the other.  The IRS’ primary goal in such situations is to insure both parties are consistent in their tax treatment of the transaction.  

Business owners should consider formalizing in writing company policies.  These written conditions can even serve as damage control in the event of an IRS invasion. 

For example, a company can declare in writing that any owner business expenses or wages deemed “unreasonable” by the IRS be reclassified as loans due the company.  Such foresight may prevent IRS treatment of such disallowed expenses as constructive dividends to owners. 

Likewise, companies should consider documentation policies preventing employees from utilizing company vehicles and computers for personal purposes.  Besides declaring business-usage intent to the IRS, such written policies may also provide a legal firewall in case of abuse of business assets. 

Unfortunately, some paperwork is indeed good for the tax soul. 

“I’m shredding the document...It’s none of your *@#!! business.”  -John Hiatt 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.  Previous articles archived at www.duvallcpa.com.