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Taxpayers who seek assistance from IRS enrolled agents have access to plenty of information about substantiation of tax deductions. When the IRS audits someone, documentary proof is required to validate the deductible expenses under investigation. Professionals with enrolled agent certification are more familiar than most tax practitioners with consequences from IRS audits.

Surprisingly, many taxpayers who claim questionable deductions have less than adequate record keeping systems. This is particularly troublesome considering the increasing likelihood of IRS audits regarding certain activities and tax deduction categories. The enrolled agent exam addresses the types of expenses that are deductible in specific situations.

The best time for an EA to convey details about documenting tax deductions is before an IRS audit occurs. After the IRS begins its process, the lack of supporting evidence is already an accomplished error. The combined knowledge of an EA about IRS audits and allowable deductions is a strong reason for hiring an enrolled agent tax preparer. An EA is educated to render valuable advice along with preparation of tax returns and representing taxpayers before the IRS.

The first step of enrolled agent work for taxpayers with IRS audit notices is comparison of the amounts claimed on a tax return with records and receipts. When they match, an explanation is prepared for the IRS examiner. If they do not match, a disallowance of the deductions is likely. Even if the amounts are legitimate, substantiation with documentary evidence is required.

An IRS audit notice normally asks for all types of documentation - cancelled checks, receipts, and bank statements. Sometimes the support a taxpayer can produce is a little different. For example, credit card statements are acceptable. Another avenue for supporting a deduction is possible when no receipt is available. On occasion, the IRS has allowed a taxpayer to deduct items purchased that are substantiated by photographs and evidence of the market cost for such items. An example is the purchase of textbooks for courses that a taxpayer proves with a transcript were taken in a particular year.

Some tax deductions require more than receipts. The most significant area is charitable contributions. Deducting a gift to charity necessitates having a confirmation letter from the organization. The letter must state whether anything of value was provided in exchange for the donation. A tax deduction is only permitted for the amount that does not include any value received.

Business use of a personal vehicle is another matter where IRS rules mandate additional records. A mileage log is needed that shows dates and purposes of business use along with the number of miles. Other cases in which the IRS is likely to demand supporting documentation involve business travel, meals, and entertainment. Taxpayers should prepare to demonstrate the business nature of these activities and prove that they were not primarily personal.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for IRS enrolled agents and tax professionals. Access to free questions for the enrolled agent certification is available on their website.

By Sawyer Adams
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