March 17, 2005

Substantiating Documentation

In yesterday's 'Tax Tips You Can Bank On,' we talked about the importance of documentation in 'audit-proofing' your Tax Returns.

When the average taxpayer's audit results in 'Disallowed Deductions,' or payment of back taxes, and/or penalties, most of the time the reason is 'lack of substantiating documentation.'

In other words, it's not that your deduction was undeserved, necessarily. It's just that you didn't have the records the IRS Auditor wanted to see.

So what can you do IN ADVANCE to possibly ward off an audit, if you know for certain that you deserve a deduction, but you also know for certain that you can't 'prove it?' Or what can you do if a legitimate deduction 'appears' to be 'outside the norm,' but actually is legit?

Has your tax preparer or TurboTaxT ever told you about an IRS Form 8275, called a 'Disclosure Statement?'

Probably not.

It's been around a long time, last revised in May 2001. Instructions for using it were updated just two months ago, in January of this year, 2005.

I have Form 8275 and the Instructions ready for you:
1. Go to www.HomeBusinessTaxSavings.com
2. Click on 'Valuable Links & Other Free Stuff'
3. Click on 'IRS Forms and Publications'
4. Look under flashing 'HOT' icon at top of page.

This form can be used to explain anything on your tax return that may require clarification, in the event an IRS person reviews your Tax Return to determine whether or not to audit you.

On this form, NEVER admit that you do not have adequate records. But DO state, as FACT, that you qualify for some specific deduction. Example: You claimed 3,000 miles in vehicle deductions last year, and this year you are claiming 13,000 miles. Why the 10,000 mile increase?

Form 8275 is a 2-page document. At the bottom of page 2, ADD THIS WORDING: 'Under Penalty of Perjury, I attest that the above is true, complete and accurate to the best of my knowledge.'

But don't sign it - not yet.

Take the form to a Notary Public, and sign it in his/her presence, and have him/her sign and emboss the form.

Warning: Do NOT file an electronic return. File a 'paper return,' and attach this document to your Return.

Could a Form 8275 draw the attention of the IRS? Yes.

Is that a problem? Not likely.

Why not? Think about it. If someone files a NOTARIZED statement concluding with the words: 'Under PENALTY of PERJURY.' is that person likely a tax-avoider? Probably not.

'Under PENALTY of PERJURY' means, 'If you can prove I am lying, send me to jail.'

Another benefit of using Form 8275?

If you are audited, and your audit gets as far as Tax Court, your notarized statement will carry the weight of 'sworn testimony.'

Warning: As they say in the circus, 'Boys and girls, do not try this at home.' Always work with a professional tax advisor who is a seasoned expert in small-business tax law.

I do not prepare tax returns, but let me know if you need help in finding a tax pro who really understands this stuff.

Now, there's a 'Tax Tip You Can Bank On!' More tomorrow.

P.S. -- If you are already cross-wise with the IRS, or have been a 'non-filer,' let me know and I'll point to you expert help by an authority named Dan Pilla. Email me in confidence at TaxAuthor@comcast.net.
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