Tax record keeping – it's the law!

September 16, 2014 by Carol Thompson, EA
Woman filling out a tax form

When it comes to proving deductions taken on a tax return, the burden of proof is on the taxpayer, according to the Internal Revenue Code (IRC). The taxpayer must be able to prove deductions by adequate records and substantial evidence. This is a brief description of records that must be maintained and where to find additional information.

In order to prepare your tax return, Congress and the IRS have the same expectation of taxpayers:

  1.  That you are following the rules for recordkeeping and understand how to keep your books;
  2. That before you began the return, you organized all of your documents and added them up by line number/deduction with a calculator that uses a tape – or an Excel worksheet;
  3. That you kept all of your receipts bundled by deduction after preparing your tax return; and
  4. That you maintained the records with a copy of your tax return in case you receive a letter or audit notice from the IRS (or state taxing agency).
All forms, publications, and IRS regulations mentioned below are located at www.IRS.gov, and may be downloaded at no cost, or they can be found by using any quality search engine, such as Google or Bing.

  • Internal Revenue Code Section 6001 states: “Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records … and comply with such rules and regulations as the Secretary may from time to time prescribe.” What this means is that taxpayers are required by law to maintain proper records to prove deductions by credible evidence.
  • Credible Evidence: For tax purposes credible evidence is based on the quality of documentation presented to the IRS. If the documents would not convince a court of their worthiness, the IRS does not have to accept them.
  • Treasury Regulation §1.6001(a) requires taxpayers to keep permanent books and records so as to prove gross income, deductions, credits, or other items shown on a tax return.
  • Publication 583, Starting a Business and Keeping Records, is a good beginning primer on how to keep records, even if you do not own a business. This publication has lists of records to keep for income, purchases, expenses, travel, entertainment, mileage, and asset purchases. If you own a business, this is an invaluable resource.
  • Publication 463, Travel, Entertainment, Gift, and Car Expenses, is a must for anyone who drives a personal vehicle for their employer or their own business.
  • Bookkeeping: There is no required method of keeping the books for a business. The law does require that the method used clearly and accurately reflects the gross income and expenses.
  • Small Business/Self-Employed Tax Center. The IRS website includes an entire area for small businesses. Everything from writing a marketing plan for a new business, to recordkeeping, to useful links to many other government agencies can be found on this site. Look for www.sba.gov for their checklist to starting a business.
Substantial/Documentary Evidence – Forms of Proof: Documentary evidence includes the invoice or receipt along wit proof of payment showing that the bill was paid. As an example, for most deductions, taxpayers should have the following:

  • Receipts or invoices (with proof of payment);
  • Cancelled checks (these are not enough by themselves);
  • Credit card statements (these are not enough by themselves); and
  • Contemporaneous (timely) logs for travel, meals, and mileage.

This blog does not provide legal, financial, accounting, or tax advice. The content on this blog is “as is” and carries no warranties. TaxAudit does not warrant or guarantee the accuracy, reliability, and completeness of the content of this blog. Content may become out of date as tax laws change. TaxAudit may, but has no obligation to monitor or respond to comments.