In the next year—2010—the IRS plans to look closely at small business owners and the self-employed.  Here’s how to be ready if an auditor comes knocking at your door.  Now, don’t panic.  Don’t get mad.  You’re honest, right?  Well here’s the secret word on how to deal with the IRS.  Preparation.  Preparation means substantiation.  If you have your receipts and checks in order, you have nothing to fear.  Here’s what to do:

Meals and Entertainment. A meal or tickets to entertain clients that costs $75 or more must be backed up with a piece of paper.  Any expense under $75 can be substantiated with an entry in your day planner or diary.  In both cases, you need the date, the restaurant or entertainment facility name, the address, the amount paid, the person or people you were with, and the business discussion.  If there’s no business relationship or connection to your expense, you get no deduction.  The tax pros call it business “nexus.”

Travel. Here you’ll need copies of your bills and checks to prove they were paid.  You’ll also need to establish the business nexus for the expense.

Auto Use. This is easy.  The IRS wants a contemporaneous record of the business miles and the total miles you put on your vehicle.  Only the business miles, or the business percentage based on total miles driven, are allowed.  Many clients keep a pocket tape recorder to record the miles driven and their purpose.  They later transcribe the tapes and record the miles.  Handing the transcripts and the tapes to an auditor usually eliminates the auto issue.

Home Office. This also should be easy.  Diagram your office and have someone take a picture of you holding up the local newspaper with the date as clear as possible.  Remember, you can be audited up to three years after you file.  So a 2009 return filed on time may be audited through April 15^th, 2013.  You may have moved in the interim. Or perhaps you decided to discontinue your home office.  In either case, the picture with the date establishes that you did have an office in 2009.

Tags: April 15, auditor, auto expense, bookkeeping, entertainment, home office, Internal Revenue Service, IRS, IRS problems, meals, nexus, receipts, self employed, Small Business, tax audit, tax resolution services, travel deduction

This entry was posted on Thursday, February 18th, 2010 at 4:29 am and is filed under Finance, Government. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.