Everyone should do their upmost to prevent an audit on their taxes, but you should always be prepared for an audit. The best way to increase your chances of coming out of audit unscathed is to keep excellent records. The IRS will not take your word as proof of anything, so it pays to have as much documentation to back up your taxes as possible.
If you are not doing so already, set up a filing system and update it consistently. You can purchase online tracking systems and other software, but a simple spreadsheet is all you really need for your bookkeeping. This will help you get organized and give you a clear picture of where you stand financially. Here are a few tips to help you maintain a good bookkeeping system.
Receipts - If you don't have a receipt, don't claim the deduction. If you can't find a receipt, try to obtain a copy from the company who sold you the item. Credit card statements are dubious proof because many don't itemize what you bought.
Bills—Like credit card statements, canceled checks don't prove anything except that you paid for something. If you pay a business-related bill by check, the important item to file is the invoice, along with the canceled check if possible.
Mileage logbook—If you use your car for business, track all your business mileage. Keep a logbook in your car and use it at the beginning and end of every client visit and office-supply run. Record the date, starting and ending mileage, and the client name or other business purpose.
Appointment book—You will need to keep your appointment book as a record of your business meetings, conferences you attended, and other business related tasks you did. The book will confirm your receipts and mileage and, in the event of a loss, helps you prove that your business is legitimate and real.
Check stubs and invoices—Keep a copy of every invoice you send a client and the check stub that goes with that invoice.
Account statements—If possible, use separate bank accounts for your business. File all account statements, both business and personal. Comingling will just create a headache for you as you try to make sense of countless personal and business transactions.
If you are audited and found to owe back taxes, you can appeal that audit by writing your district director to report that you disagree with the amount you owe. You may be able to reduce the amount you owe but be aware that if you lose, you'll owe late fees, too.
Here is an example of a for real estate activity log to help you keep track:
B-1. Check & review sources for finding investment properties
B-2. Develop a list of bird dogs as sources of good buys and motivated sellers
B-3. Meet with bird dogs as sources of good buys and motivated sellers
B-4. Do a market\location analysis including emerging or reemerging locations
B-5. Checkout specific neighborhoods performing a neighborhood analysis
B-6. Physically go out and search for investment properties
B-7. Contact prospective property owners
B-8. Do a preliminary quantitative analysis on properties (such as the cap rate)
B-9. Do a preliminary "drive-by" property inspection
B-10. Make & negotiate purchase offers on property
B-11. Verify the income, expenses, vacancies on the property's operating statement
B-12. Review leases, utility bills, maintenance contracts, other pertinent documents
B-13. Do a thorough physical property inspection analysis
B-14. Obtain Estoppel Statements from the seller and tenants.
B-15. Forecast projected income & expenses for a total projected annual yield
Offers and Contracts:
B-16. Make final offers
B-17. Prepare contract for purchase of property
B-18. Review seller's contract for purchase of their property
B-19. Check out sources of financing for acquiring property
B-20. Review Member credit reports; repair or correct accordingly.
B-21. Prepare a Credibility & Profile Package
B-22. Meet and develop rapport with lending sources
B-23. Prepare a Loan Package for a property acquisition
B-24. Arrange for financing for acquiring property
B-25. Negotiate the seller to hold financing
B-26. Prepare for closing of the prop. purchase, such as arranging inspections, certs, etc
B-27. Do a pre-closing inspection of the property
B-28. Attend the closing of the purchase of the property
B-29. Take care of any post-closing matters
B-30. Follow-up to see if any prior prospective sellers are more prone to renegotiating
B-31. Renegotiate the transaction to finalize the purchase as per the above list
Financial Administration\Operation of Property:
The author has permitted the reprinting and redistribution of this article.