Getting to Know the Tax Code

Getting to Know the Tax Code

Part 1-Substantiation aka CYA

From my recent experience as an IRS Revenue Agent working in Small Business-Self Employed Examination I noticed that many small business owners run into trouble with the following tax code section:

Internal Revenue Code (IRC) Section 6001

IRC§ 6001 - Notice or regulations requiring records, statements, and special returns

Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. The only records which an employer shall be required to keep under this section in connection with charged tips shall be charge receipts, records necessary to comply with section 6053 (c), and copies of statements furnished by employees under section 6053 (a).

In simple terms the above code section says that as a business owner you are required to keep adequate business records to be able to substantiate, or prove, your income and expenses related to your business.

If your business is selected for examination, often referred to as an audit, the burden of proof is on you to support by documentation any expenses you claim on your federal tax return(s).  If you can not provide this support the examiner may disallow the expense thus increasing your taxable income.  This often results in a tax deficiency, in other words owing the IRS for the underpayment in the tax year under examination, and may also result in you being assessed penalties.

Some suggestions:

•             Have a knowledgeable book keeper record your transactions on a timely basis  
•       Keep your personal and business expenses separate
•       Maintain your receipts, invoices, and credit card statements chronologically, and in some logical order that clearly reflects your business expenses as shown on your return