20 Sep Bad Expense Records? Be Ready for a Hefty Tax Bill!
If you’re a business owner or independent contractor, you’ve probably heard of the importance of keeping expense records. However, we feel it’s important to stress just how important keeping those records is. If you keep bad expense records, you’ll end up paying a lot more money each year!
The consequences of keeping bad expense records can be huge!
Everyone has expenses, so it makes sense that you’d want to claim those to get a larger tax refund. Unfortunately, many people want to claim their deductions without having proper expense records.
Some people try to estimate their deductions with inaccurate numbers.
Others just don’t claim deductions because of their bad expense records.
Both of these routes will cost you money.
If you simply try to estimate your deductions, the IRS will certainly take notice. Many clients of ours have put even numbers for their expenses (such as $5000 or that they drove an even 20,000 miles). The IRS understands recognizes those even numbers as estimates and will often challenge taxpayers who use them. In other words: even numbers are a serious IRS audit trigger. At that point, you’ll be forced to show your accurate expense records. If you don’t have any, you could end up paying even more money.
To avoid IRS trouble, some may respond by just not claiming any deductions at all. This still leaves you in a bad position, though. You’re paying taxes on all of your income, regardless of what expenses you incurred for the tax year. You’re just giving more money to the IRS than you should because of those poor records.
No matter how you look at it, bad records make you lose money.
There is a rule in place that allows you to still claim deductions even without records called the Cohan Rule. The Cohan Rule, in a nutshell, suggests that everyone will have some kind of expenses, and the tax system will honor that. However, if you use that rule, understand that you’ll only receive the minimum deductions, thus making your return as small as possible.
At the end of the day, it’s always best to hold onto your records. Keep a small notebook for the year and jot down every expense you have. Keep all your receipts and tally up the total when doing your return. The more thorough you are now, the more you’ll save at the end.
If you want more advice on keeping expense records or need help filing your taxes, call us at 614-524-4888!