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:
Is your credit card statement enough to pass an IRS audit?
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.
Records to Keep
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 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:
Credit card statements and receipts
Cash register tape receipt
Any other document reflecting proof of payments or electronic funds transfers.
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:
Invoices of purchase and sale
Documents that identify amount, payee, and proof of payment or electronic funds transferred (for example cancelled checks)
Real estate closing statements
Entertainment, Travel, and Gifts
When you deduct gifts, entertainment, or travel expenses there are specific elements required as valid proof. These include the reason for the expense or business benefit gained, the amount of each separate expense, and even proof of your presence at a business meal given to a client. IRS Publication 463 specifies all requirements.
Some useful tips
Here are some basic tips to help keep your records straight for a smooth IRS tax audit:
Photograph or scan your documents
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.
Organize records by category
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.
Consider the period of limitations
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.
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.
As a small business owner, understanding the various IRS-required forms for subcontractors is absolutely essential to remain compliant. This guide will let you know all about creating 1099 forms and what types of forms you may need..