At the moment of filing your tax returns, there is no paperwork or receipts required as proof of your tax deductions. It is only in the case of an Internal Revenue Service (IRS) tax audit that you will be required to prove the expenses reported on your tax return.
The IRS will not allow your deductions if you do not provide appropriate documentation of your expenses. Depending on your situation you may not have kept all of your receipts to report for your tax return. You may be wondering, “Are credit card statements sufficient for IRS audits”?
In this article, we will go over what the IRS considers appropriate tax records and if your credit card statement will be enough to pass a tax audit. We will also give you some tips to help you stay organized and always be ready for tax season.
So, let’s start with the big question:
The short answer is YES. The IRS accepts credit card statements as proof of tax write-offs (here are the best apps to track receipts for taxes).
But, if the IRS determines the information on your statement does not provide enough detail of your purchases, they can ask you for another type of proof.
When being audited, there are two things the IRS might ask for in order to prove most deductible expenses: a record of payment and a receipt of payment.
A credit card statement can only serve as a record of payment, but a receipt may be needed to provide the details of such purchase. If you have no receipts, you cannot prove that you bought something tax-deductible. While it is true that some records on credit card statements might actually provide more details of the purchase, you cannot completely rely on this.
It is always important to keep documents that support the entries in your books. You can use any record-keeping system you’d like (like Bonsai's tax receipt organizer), as long as your expenses and income are accurate, clear and all the necessary details are included.
Let’s review the records you should be keeping depending on the type of income or expense.
Any payroll, purchase, sale, or other business transactions will generate documents you can use for support. Depending on the transaction, the IRS has different types of records that are considered as valid proof or receipts to keep for taxes. Your credit card statement can be used only for proof of purchases and expenses:
Purchases are the items that you may buy and resell in your business. This includes the cost of raw materials purchased for manufacturing if you are a producer. Expenses are any other cost you incur in your business other than purchases. This includes employee’s payment, rent expense, gas expenses (business use of your car), or office improvements.
The documents required as proof of purchases and expenses include the following:
The IRS notes that a combination of documents may be needed to support all elements of the expense, which is why it’s important you have more than one type of record.
Here are some other types of records you should keep.
The gross receipts are the total income you receive from the goods sold or services provided by your business. Your documents should show amounts and sources of the gross receipts. Some of the records the IRS requires include:
Any property that you purchase to use on your business, such as furniture, vehicles, or machinery is considered an asset. You must always keep records to verify the annual depreciation, and your gain or loss if the asset is sold.
Some important information your documents should show includes the original purchase price, when and how the asset was purchased and sold (if you disposed of it later), selling price, and deductions for depreciation. Documents that can help you prove that include:
Here are some basic tips to help keep your records straight for a smooth IRS tax audit:
The IRS accepts scanned and digital receipts for tax write-offs. So if you are not good at storing your papers, you can always just snap a photo on your smartphone. Always make sure you get a clear picture where you can see the date, total purchase amount, and address of the business. At least 3 years is the length to keep tax receipts so scanning your documents could allow you to easily access them in the future.
Using file folders is an extremely effective way to organize your documents. You can use several folders and label them with the different categories that apply to your business’ income and expenses. For example medical expenses, banking info, child care receipts, or goodwill donations.
This is the period of time in which you can claim a credit or refund on your tax returns, or when the IRS can determine additional tax. In general, you should keep your federal tax records for a period of three years after you file.
Keep in mind, there are some scenarios where the IRS establishes a different period of limitations.
If you are self-employed, Bonsai will help you with calculations, record-keeping, and guidance through the process of filing your taxes. With Bonsai Tax you can track the records of your business expenses by scanning your cash receipts and importing credit card and bank statements.
Give yourself peace of mind and let Bonsai do all the work.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?