1. You didn’t properly document your business meals.
Meals have some extra documentation requirements, above and beyond normal expenses. You have to be able to show the amount of the meal, the date of the meal, the location of the meal, the business purpose of the meal, the number of people served, and who was present at the meal. A receipt for the meal only gets you halfway there. You should be keeping the receipt for the meal AND jotting down the business purpose and people attending on that receipt. A further trap with business meals is that receipt ink tends to fade over time, and restaurants seem to use the cheapest ink. So even if you do keep your receipts, you might find that the ink has become virtually invisible when you look at them two years later. Once again, an app like Dext*, where you take a photo of the receipt, will protect you from disappearing receipt ink.
2. You thought it would be easy to justify travel expenses.
You bought a plane ticket and flew out to a business conference, staying in a hotel for a few days. Seems like an easy business trip to justify, right? Wrong. Don’t assume your IRS auditor is willing to apply common sense to business travel. For example, your auditor will want to see your receipts, of course, but they will also want to see an itinerary and conference schedule. They want you to demonstrate that you actually spent your time doing business things on your trip. We once had an auditor go so far as to ask for boarding passes and luggage claim tickets (were they worried that the taxpayer didn’t board the plane?). Did we mention recently that we love Dext*? It’ll store more than receipts. Take a photo of schedules, itineraries, boarding passes, baggage tickets and submit them, and they’ll be there when you need them.
Business travel that doesn’t have a formal itinerary can be even harder to substantiate. What if you’re meeting with clients in another city, or conducting research? Maintain an appointment log, a calendar, keep email confirmations for your appointments, follow up with emailed meeting summaries, and any other documentation that might help show what you were doing on that trip.
3. You overlooked documentation for your deposits.
Most of us focus on how to justify our expenses under audit, but audits don’t stop with expenses. An auditor will sometimes decide to review every deposit in all of your bank accounts, searching for unreported income. Here are some examples of things an auditor might decide to count as “income”: Loan proceeds, insurance refunds, gifts, reimbursements from your friends for expenses, transfers between spouses who have separate bank accounts. They might even count transfers between your own bank accounts, or cash deposits of income you reported elsewhere, if you can’t easily show where that money came from. Many banks won’t show you images of deposits, which can make it hard for you to identify the deposits. In addition to this, it’s important to keep things like loan documents, letters about refunds, notes about gifts or reimbursements.
* This isn’t a paid advertisement for Dext, and we don’t get any kickbacks from them. We really do like them!
Find Part 1 here.