How to reconstruct your tax records … legally

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in Small Business Tax,Small Business Tax Deduction Strategies

During an audit, chances are that you won't be able to produce all the receipts, bills or other pieces of written information you'll need to back up your claims, especially if the audit comes several years after the tax year in question.


Strategy: You can reconstruct records to provide adequate evidence of the items on your tax return. This is perfectly acceptable to the IRS; the tax law doesn't require perfect recordkeeping habits (it's just better that way).


For interest payments, medical expenses and the like, you can reconstruct records by securing statements or affidavits from the parties involved. Or, you prove the expenses with credit card statements, even though receipts are missing.


If you made charitable contributions above $250, you're required to obtain a receipt by the time you file your return. Does that mean you're out of luck if you've lost the receipt? Not necessarily. You only have to prove that you had the receipt at that time. A statement from the charity or a photocopy of the receipt from the charity's files is sufficient.


When you can't obtain statements from involved parties, try to collect other data that can support a deduction. For instance, you may have a date book or diary that indicates you attended a seminar and incurred travel expenses.


Final tip: Auditors typically give you the benefit of the doubt if your secondary proof is orderly and you appear to have honest intentions.

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