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Jon Andrews, Certified Public Accountant (CPA)
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IRS Audits The burden of proof

Customer Question

IRS Audits require "what" specific proof of income? Will invoices do, or will I need more proof like credit cards and bank transaction records? Income statements from "individual" sales?

We are a Self Employed Partnership in an online (web-based) wholesale business. Not collecting taxes from buyers.

Thanks -
[email protected]
Submitted: 11 years ago.
Category: Tax
Expert:  JBE, CPA replied 11 years ago.
Invoice are certainly an important piece of the substantiation puzzle. But then so are bank deposits and credit card reciepts. If you are able to reconcile the total of your invoices to your total bank deposits this will be credible substantive documentation of your income and be sufficient enough proof for most any IRS agent.

JBE, CPA
    
Expert:  Jon Andrews replied 11 years ago.

The specifics will vary from case to case and will depend, in part, on the agent's comfort level with your recordkeeping. In general, you can expect that the first level of inquiry will be your "books and records" whatever that may be. If you are keeping your books in Quickbooks, Quicken, etc. that will go a long way in getting you off on the right foot. Past that, the agent will have the right to ask you to "prove" everything that is in your books and records. What qualifies as "prrof" will, again, depend on the exact circumstances. Normally, if you have a bank deposit, either by cash, check, or credit card, that matches up with a sales invoice you will be in good shape on the income side.


On the expense side, you should have a cancelled check or credit card receipt that matches up with an invoice or other source document for everything that goes out of the checking account.


If your "lifestyle" exceeds what it appears that you are making from your business and other reported sources of income, you can expect that the IRS will attempt to "estimate" what additional income you would have to have had in order to live that lifestyle and then you will be in a position where you need to refute that. Your best defense in this case is to have a good set of books and records that support what you have reported.


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Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience: I deal with all levels of tax planning and controversy - from the ordinary to the complex.
Jon Andrews and other Tax Specialists are ready to help you
Customer: replied 11 years ago.
Reply to JBE, CPA's Post: Thank you for your response.
Customer: replied 11 years ago.
Reply to Jon Andrews's Post: Jon,

Thank you for your elaborate response.

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