Some tax recordkeeping requirements are specific and strict. For example, you must have a canceled check, credit card receipt, or receipt from a charitable organization to substantiate a cash contribution you make. Similarly, the law requires certain entries in a mileage log to substantiate auto mileage -- the date, destination, the odometer readings when you begin and end the trip, the miles and business purpose (for example, sales call, John Smith). There are some acceptable deviations, such as reporting one entry for several uninterrupted destinations.
Writing Off Business Clothes
Humphrey Igberaese claimed an employee-business-expense deduction of $1,500 for a business suit, shoes, and dry cleaning. He did not present any evidence regarding this deduction.
The Court explained that the cost of buying and maintaining clothes is deductible only if the clothing is:
Required for the taxpayer's employment. Not suitable for general or personal wear. Not used for general or personal wear.
Since the taxpayer did not show these requirements were met, the clothing deduction was denied.
If you fail to keep the proper records, the deductions can be lost. In one Tax Court case, the taxpayer's records were found to be inadequate and not credible in three areas: business travel, charitable contributions and casualty loss deductions.
Facts of the case: Humphrey Igberaese was an employee who claimed a deduction for business travel of 39,496 miles, but only showed 29,623 business miles on Form 2106. The deduction related to trips he made to professional association conferences to maintain skills that were important to his employment. The only documentary evidence relating to the trips were a few pages in a small notebook. The entries consisted of the name of the conference, the place, the start and end date and the miles driven. The taxpayer produced no other evidence that he attended the conferences.
The Court noted in one instance, Igberaese claimed to have driven alone some 6,854 miles round trip to a three-day conference. There were other similar entries. The Court found the alleged business travel to be uncorroborated. Moreover, it noted the travel would be so onerous to most people that it was "inherently unlikely." The Court disallowed all of the mileage deductions.
In some circumstances, courts can be more flexible and allow a deduction with less than complete documentation. Under the "Cohan rule," named for a 1930 Tax Court case, taxpayers may be able to reasonably estimate deductions when evidence is inadequate. (It is often allowed when taxpayers lose records through no fault of their own, after for example a fire or disaster.) But travel and entertainment expenses come under special rules. Without proper documentation, courts cannot allow a deduction for them under the Cohan rule.
What makes good documentation even more important is that the IRS knows that most taxpayers are less than diligent in recordkeeping, particularly when it comes to auto mileage, business meals and entertainment. That means if you're audited, there's a high probability you'll be asked for documentation.
Donations to Qualified Charities
Charitable contributions also must meet strict requirements. Under current law, you must have a canceled check, other bank record (such as a credit card statement), or receipt from the qualified organization for any cash contribution. For contributions of $250 or more, you must have a statement from the organization acknowledging the contribution. (Slightly different requirements apply to noncash contributions.)
In prior years, the charitable donation requirements were less stringent. Rather than a canceled check, etc., taxpayers could keep "reliable written records" documenting contributions under $250. Igberaese argued he maintained such records for cash contributions to his church, but the Court found his testimony implausible and his documentation not reliable so it disallowed the deductions claimed.
Igberaese also claimed to have made charitable contributions of clothing and other household items. He prepared a spreadsheet of donations at the time the IRS audited him based on a list prepared at the time the items were given. The original handwritten list was not presented to the Court. The Court noted that the taxpayer admitted he did not compile values in the spreadsheet until the audit, at which time he arrived at a total value of $16,000 -- precisely equal to the amount of the deduction claimed on the return.
The quantities and purchase prices of the items seemed high, according to the Court, as were Igberaese's assigned values for the used items. For example, he claimed to donate 10 used business suits with a value of $250 and 12 blankets or sheets with a value of $150 each. Once again, the Court disallowed the write-off.
Note: Under current law, noncash contributions of similar items (such as items of clothing or several pieces of artwork) in excess of $5,000 require a qualified appraisal.
"In connection with each deduction, Igberaese presented little beyond his own unpersuasive testimony and self-created documentation to corroborate his series of implausible deductions."
-- The Tax Court
Casualty Loss Deductions
Finally, Igberaese claimed a casualty loss of $5,430 after a hurricane damaged his Florida home and yard. His substantiation consisted only of a handwritten receipt from a landscaper to whom he paid cash. He did not have pictures of the loss or bank statements to substantiate a cash withdrawal. The Court only allowed the portion of the casualty loss deduction corroborated by his insurance agent's report and allowed by the IRS. (Humphrey Edefua Igberaese, T.C. Memo. 2010-284)
Many taxpayers who go to Tax Court after the IRS disallows write-offs fail to win -- not because their expenses aren't deductible but because their documentation is inadequate.
The lesson from this case is clear: Keep good records to protect your deductions. Follow practices such as recording expenses when they occur. Keep more than just proof of payment. Also keep other documents, such as credit card slips and invoices. If you're unsure of what you need, check with your tax adviser.