Learn what auditors will look for when trying to prove your deductions so you are prepared

download (3)Tax audits still remain relatively rare, but should you face one, be prepared for questions. Tax authorities tend to deny everything and then make you prove that your deductions are valid. Here are some suggestions.

 
To prove your deduction most auditors are looking for two required documents.

 
Receipts. The receipt should clearly show the company or entity, the date, the value of the activity, and a clear description of the activity. In the case of donations, the receipt should also have a statement that confirms you received no benefit in return for your donation. It should also state that you are not retaining part ownership of the donation.

 
Proof of payment. You will need a canceled check, a bank statement, or a credit card receipt and related statement.

 
Other proof. In addition to the above, there are certain deductions that require additional documentation. Here are the most common:

 
Contemporaneous. Any proof of payment and receipts should generally match the date of the activity. The IRS and state agencies are quick to dismiss receipts that are obtained after the fact. A good rule of thumb is to ensure receipts and proof of payment are received at the time of the activity. If not, at least make sure you have receipts and payment proof within the tax year the deduction is taken.

 
Mileage logs. You will need to show properly maintained mileage logs for business miles, charitable miles, and any medical mile deductions.
Business records. You will need financial statements for any business-related activity with supporting documentation.

 
Residency. If you live in multiple states or multiple countries, you may have to prove where you lived during the year. Keep records that show your physical presence to support your tax filings.

 
Proof of non-reimbursement. If you claim any unreimbursed business expenses, many states are asking you to prove that you were not able to get these expenses reimbursed from your employer. The easiest ways to do this are to show a denied expense report or to get your employer to write a letter that confirms your expenses were not reimbursed. Those most impacted by this are musicians, barbers/hairstylists, construction workers, and anyone who uses their own tools to do their job for their employer.

 
While you can never be completely sure you won’t face an audit in your lifetime, you now know which documents an auditor will want.

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#TaxTipTuesday- Did you know you may be able to deduct miles driven for purposes other than business?

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Deduct all of the mileage you’re entitled to — but not more

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.

 

 

What are the deduction rates?

The rates vary depending on the purpose and the year:

Business: 54 cents (2016), 53.5 cents (2017)

Medical: 19 cents (2016), 17 cents (2017)

Moving: 19 cents (2016), 17 cents (2017)

Charitable: 14 cents (2016 and 2017)

The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.

 

 

What other limits apply?

The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.

For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses generally are deductible only to the extent they exceed 10% of your adjusted gross income. (For 2016, the deduction threshold is 7.5% for qualifying seniors.)

And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.

 

 

Other considerations

There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.

And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.