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Recording
the Source for
All Deposits in Your
Check Register
by
Sandy Botkin, CPA, Esq.
President,
Tax Reduction Institute of Germantown, Maryland
Too
many times people have said at my seminars that they
are worried about an audit because they do not have
the receipts for the documentation taken. Unfortunately,
there is more to an audit than worrying about documentation
for deductions. They need to worry about the income
side as well.
IRS
has recently instituted an extra type of audit procedure.
Regardless of the type of audit, IRS now asks for all
bank records and money market accounts for the year
or years covering the audit. At first blush, this may
seem strange. If you were being audited for your automobile
or travel expenses, why would IRS want to see your yearly
bank records? The answer is that IRS is now checking
all taxpayers for unreported income.
IRS
will match all deposits made into your bank accounts
and compare the totals to your reported income. If the
deposits exceed what you reported as income, you’d
better have a great explanation or IRS will hit you
with "unreported income" on the difference.
You
might be thinking, "wait a minute, not every deposit
is taxable." This is quite true. Gifts and inheritances
are tax-free. Reimbursements from insurance companies
and by employers for business expenses where a proper
accounting was made are also tax-free. Most municipal
bond interest is tax-free. I had a student who could
never balance his bank account. His idea of balancing
an account was to close out one account every six months
and open up another one. I hope this doesn’t apply
to you! None of these items mentioned are taxable. However,
unless you can clearly demonstrate that the deposits
came from a tax-exempt source, IRS will construe your
deposits as unreported income.
It
is now necessary that you record and identify the sources
of all deposits in your check register. For example,
if you receive a deposit as a commission checks from
X Company, the check register would read," commission
check from X company." If you were to receive a
tax-free reimbursement from your health insurance company,
the check register would read," reimbursement from
X health insurance company."
Finally,
for all non-taxable items, make a copy of the
check that you received, and put it in a yearly file.
Thus if you receive a reimbursement from your employer
for business expenses that you gave an accounting for,
you should copy the check.
If
you follow my advice, you will certainly make any IRS
audit less painful and make your life less taxing.
This
tax tip came from Sandy Botkin’s Tax Strategies
for Business Professionals and his Tax Advantage System.
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