Looks like the IRS is stepping up their auditing efforts. As predicted in an article posted on MDTAXES three years ago, Are You At Risk of Being Audited, I sadly noted that the IRS had planned to increase the number of tax returns they will be examining.

To quote myself from three years ago, “The IRS has acknowledged that the Service can’t ‘audit its way out of the tax gap.’ Even so, audits remain an important compliance tool…[and you should] expect the IRS to rely on audits as a deterrent against non-compliance with the current tax laws.”

This past summer and fall, my firm assisted a handful of clients who were being audited by the IRS. The most noticeable trend was that many of these examinations were handled as “desk audits”. Instead of meeting face to face with an IRS agent, our clients were asked to compile certain records, and then submit their documentation through the mail for examination. (Makes you wonder if the IRS is offshoring these audits to India. Just kidding, of course. Or am I?)

Based on our limited sample of audited taxpayers, it appears the IRS is currently focusing their auditing efforts on medical expenses, charitable donations, and employee business expenses. Let’s take a look at the documentation the IRS requests in connection with these audits:

Medical and Dental Expenses

  • Send copies of cancelled checks, receipts or statements for all medical savings accounts, medical and dental expenses (including medical insurance) showing the person for whom each expense was incurred, along with any insurance or employment reimbursement records. Send a copy of your medical insurance handbook or policy describing the benefits and reimbursement policy and verification of premium costs.
  • For prescription drug expenses, send copies of statements or receipts showing the prescription numbers, names of drugs, costs and date purchased.
  • For other expenses, (including capital improvements, equipment, transportation and lodging) send proof of payment and statements to show costs and medical requirement.

Charitable Donations

  • Send copies of cancelled checks and receipts for contributions to charitable organizations.
  • If the contribution was other than money, send the name and address of the charitable organization and the description of the items contributed. If the appraisal is required by Form 8283, Non-Cash Charitable Contributions, send a copy of the appraisal showing the fair market value of each item on its contribution date. In addition, send evidence of its original cost.
  • If you claimed expenses for attending a convention or similar activity, provide a statement showing you were an official representative of the organization. Also provide the organization’s reimbursement policy, expense receipts and an itinerary or agenda for the activity.

Miscellaneous Itemized Deductions and Employee Business Expenses

Please provide an explanation, receipts and records to substantiate any amounts that you entered on Schedule A lines 20, 21, and 22. For the amounts claimed on Form 2106 or Form 2106-EZ, please submit the following:

  • A copy of your employer’s reimbursement policy or a letter from the employer explaining what expenses are reimbursed. The letter should also indicate whether it is an “accountable” or “non-accountable” reimbursement plan.
  • If your employer does not have a reimbursement policy, please provide a letter from your employer indicating what expense(s), if any, are reimbursed or that no reimbursement is authorized.
  • A statement as to whether or not reimbursement is included on your W-2, and, if so, where on the W-2 the reimbursement is reported.
  • A copy of any receipts for any expenses claimed greater than $75.
  • Receipts for any lodging expenses claimed.
  • Copies of logs, diaries or other records showing all expenses incurred, job locations and dates you were at each location. For meals and entertainment, these records should detail the business purpose and the business relationship.
  • Verification of total mileage on the Vehicle(s). This can be from two repair receipts, inspection slips or any other records showing total mileage for the year.
  • For uniforms, equipment and tools: send a statement from your employer stating whether or not the expense was reimbursed. Provide your employer’s description of the reimbursement policy and the amount you were reimbursed. Send copies of cancelled checks and receipts verifying expenses.
  • For education expenses: send a statement from your employer explaining whether you needed to incur the expense in order to keep your job, salary or status. Explain in writing how the education helped you maintain the skills needed in your job and how much reimbursement you received. Send copies of receipts and cancelled checks to verify the amount you spent for books, transportation, and other educational expenses.
  • For legal, taxes, and investment counsel fees: send copies of cancelled checks, receipts, and statements showing the amount paid and the purpose of the expense.

Oy Vey

What can I say but “Oy Vey”? After reading through that list of documentation that the IRS might request from you, you really need to set up some type of system to keep your receipts and other evidence of the deductions you claim on your tax return each year.

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