This year I got a notice in the mail from the IRS requesting documents. This is an Audit.
Every year when I file my taxes I have been using TurboTax.
For the past 10+ years I pay a little amount for their accounting service that helps you in the case of an audit. While working with them to get all my documents in order for the IRS I learned a few things that I think you need to know.
Three Documents for Expenses
I learned through this process that there are three things you are needing to document and have ready like a book keeper.
Invoice – Need to show what you were billed for from the provider
Payment – Need to show that it was paid
You Paid It – Besides showing it was paid, you must show that you paid it and not someone on your behalf.
I am using Quicken for Mac to track all my expenses. Here are a few of the ways I pay bills:
Check – Checking Account
Visa Debit Card – Checking Account
American Express Card
I am paid two ways
In the software Quicken you can attach to every entry documents. Before I can attach those receipts, invoices and statements I must have a digital file like a PDF or a picture. I bought a Neat Desk Scanner years ago and have been using their software, which is now an online system.
The Neat Desk scanner lets me scan a stack of receipts making things go much faster than a flat bed scanner would do.
After scanning documents I save them in a separate folder for the year they were created. Then I attach them in Quicken to the transaction.
In Quicken they have categories already for you to use and customize. The best part for working with your Taxes is they have all the Schedules included so that you can assign a category to a tax schedule like I have in this example with the Camera Repairs in Schedule C: Repairs and maintenance.
While I have all my documents I quickly realized the problem was getting exactly what the IRS needed in a format that met their requirements was the biggest problem.
I had to go through my AMEX & Bank statements and circle every item related to a particular category showing that this was paid with my money.
You can also do this with a scanned receipt of each and every transaction.
It was easier for me to contact all the Doctors, Hospitals and medical providers and ask for a 2016 statement for all charges than providing scanned invoices. I was missing a few of the statements because I had thought I just needed to show I paid the bill not show the invoice as well.
Using Quicken I was able to create a spreadsheet of each category and payee for a particular topic that I was being asked to provide evidence to the IRS. I was mainly dealing with medical expenses due to a very expensive year for our family with medical issues.
I was misinformed
I had always been told you just need to put all your receipts in a box and if ever audited just show up and they can go through them if they want. WRONG!!!
My accountant informed me that the IRS on numerous accounts with her have said they are not their clients book keeper. You must have this in order. Also the box could only work when you are actually called in. You don’t want this to happen. You have opportunities to provide all this electronically to the IRS and handle without going for the face-to-face audit.
Spreadsheet – Be able to provide spreadsheet for any category which Quicken helps with this
Invoices & Statements – Scan all these or have them ready to scan if audited
Receipts – Scan all these or have them ready to scan if audited
Bank & Credit Card Statements – Keep all of them and have them ready if you need to scan them for the IRS during an Audit
Scanner – I recommend a scanner that is a sheet feed scanner capable of scanning multiple documents and software to help organize you documents.
Accountant – Work with an accountant to do at least your initial setup of how you need to gather documents for Taxes and for possible audit.
Tips on Invoicing
I wrote a blog early called “7 Tips for the financially struggling photographer“. In the post I talk about using the software FotoBiz for invoicing and pricing jobs. Check out that post if you need help with pricing and invoicing.