Tax & Financial Consulting Services
How to Find Deep Trouble with the IRS
Karibu (Welcome) G&G Readers,
I received this question from a G&G subscriber and thought it would be useful to some of you.
Question: I need to file my returns for the past several years. I have misplaced and lost many of the records. Is there a good way to recreate business expenses for prior tax years?
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Answer: No. You are in deep trouble.
First, the law requires documentation on a timely basis for a certain group of expenses.
This group includes
• entertainment, and
If you have to recreate the records for this group, you will obviously violate the timely rule—putting these deductions in extreme jeopardy. ("Timely" here means within a week of the expenditure, a rule that you will obviously break by recreating your records years later.)
Technically, the law contains an escape from the timely records requirement for taxpayers who can put together convincing corroborative evidence. But don't bet on corroborative evidence as a solution for your problem. I can't find any case law in which the courts granted a favorable result with the alternative corroborating evidence method for vehicles, entertainment, or travel.
Actually, all your deductions appear to be in trouble, even those for which the court could make estimates of your expenses under the Cohan rule. Why? You don't appear to qualify to recreate your tax records. Tax law grants the right to redo your records only if you have suffered some catastrophe, and your careless loss of the records does not qualify as a catastrophe. You did not mention a fire, flood, or theft as the reason your records are no longer around.
You might be thinking that your trouble can hardly get worse, but it can. Your chances of an IRS audit jumped dramatically when you failed to file your returns on time. If I were advising you one on one, I would say that you can pretty much expect an audit.
You might consider an "offer in compromise." This is something to discuss with your tax advisor, and it may have merit in your case. You will have to file all the missing returns and live up to some promises about your taxes, plus the IRS will review your offer, although the review may be far less extensive than an audit.
Planning tip. Always, without fail, file your tax return on time (or within the period for properly filed extensions). The non-filing of a tax return is a complete disaster, triggering nothing but trouble and big penalties.
Visit our website: www.gngassociates.net, click on the “Taxes” tabs to download our free weekly and monthly expense organizers to help provide an electronic backup of your business activities and expenses.
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Metta (Wishing You the Best),
Asar Maat Ra Gray
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