BiggerPockets

How Good Recordkeeping Can Get You An Unexpected Refund

The key to superior recordkeeping is to make a habit of it. Recordkeeping should be done every day or every week and at least every month.

Record keeping allows you to obtain every possible tax deduction, which is another way of cutting expenses. It is also one of the best ways to tell what does and does not work for your business as a real estate investor.

Poor recordkeeping is costly!! Tax courts regularly disallow expenses, which cannot be substantiated by sufficient records. Recordkeeping is also the single best defense against an IRS audit.

I just recently represented a client who was being audited for their tax return. This was the year they started investing in real estate. As a result, they had a lot of mortgage interest expenses, advertising expenses, and educational expenses.

When this client first went to the audit, the IRS auditor disallowed most of these deductions to the tune of $56,000, which resulted in a tax liability of $17,625 in addition to penalties and interest that had accrued.

After meeting with this client, I asked the auditor to give us one more month to come back for a meeting.

After one month of aggressive recordkeeping, pulling past statements, reconciling quicken accounts, my client was more prepared for this audit.

During this process of getting ready for the audit, I noticed that the client had overlooked consulting fees in the amount of $20,479 to purchase their properties as well as a whopping $30,000 of advertising expense that was charged to their American express card.

Not only did the IRS auditor make a positive adjustment of $50,479 but my client also received "AN UNEXPECTED" refund in the amount of $14,760.14!

My client and his wife decided that they could take the much needed time off work to spend the summer with the kids.

Tips on Good Record Keeping

The importance of having a good record keeping system for your taxes cannot be underestimated.

As a real estate investor, you will have a lot of transactions and documentation related to your deals. You must organize this information, because you will need it when to comes to filing your tax return.

If you don't have a system in place, it will cost you time and money, and in some instances - a lot of money.

Here are some tips for keeping a good record for tax time:

• Check your records every month, week and quarter.

• Double check, and make sure all the facts and figures are accurate.

• Make sure you have your cash flow mapped out so you know exactly what you have available.

• Use an easy to understand system like Quick Books

• Alternatively, you can use a simple Excel spreadsheet.

The important thing is to set up the right system and manage it properly. If you need help, hire a bookkeeper, or find someone qualified to teach you how to manage your own system.

The Burden of Proof

At the IRS examination level the burden of proof remains with the taxpayer. The burden of proof concerning an audit only shifts to the IRS in tax court. To qualify for this shift in the burden of proof, these conditions must exist:

1. You must maintain all records required by the Internal Revenue Code.

2. You must produce these records at the audit.

The IRS's best defense is to reshift the burden of proof to you and assert that you did not have adequate records.

Know the Tax Law as it Relates to You And Don't Fear the IRS

You need to know the tax law as it relates to real estate and to your personal situation. Tax laws have an effect on your everyday business.

It's important to have a sound grasp of tax law principles in order to take advantage of all available opportunities while avoiding practices that could be unintentionally criminal.

Many areas of the lax law are gray. The gray areas are mainly with deductions. Therefore if you report all taxable income and you are legally and discretely aggressive with your deductions, it is very unlikely you are going to get into any serious trouble with the IRS.

With the IRS you do have right! Your bill of right is IRS Publication #1, Your Rights as a Taxpayer

Also, know your rights!

Taxpayer rights were significantly expanded under The IRS Restructuring and Reform Act of 1998. Taxpayers can sue the IRS for damages caused by an IRS employee who "recklessly or intentionally" disregards provisions of the code or regulations in connection with collecting taxes.

Tax Tip: Knowing your rights from the outset and knowing how the system works can have an impact on your taxes before you are ever audited, if at all.

For instance, if you discreetly take aggressive positions on questionable areas of the tax law, you will know that you have a good chance of winning by actually going to Appeals, with the good possibility that the IRS auditor will back off.

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