Business owners and self-employed “Schedule C” filers: Are you keeping a tax diary? A tax diary can be a valuable tool in defending yourself against an audit. As a taxpayer, the burden of proof is on you, so keeping adequate records is essential. In addition to keeping receipts for your business expenses, a good tax diary will help you organize and document your travel expenses, mileage and automobile expenses, meal and entertainment expenses, and other miscellaneous expenses that you have a legal right to deduct from your income.
A tax diary allows you to keep what the IRS calls “contemporaneous documentation” that will justify the business purpose of your expenses. So, for example, when you go to lunch with a client named Joe, you would record in your diary the appointment, the mileage traveled, the cost of the meal (which, of course, you bought!) and the business purpose of the meeting. By doing this in a timely manner, you actually shift the burden of proof to the IRS. I have even heard a story about an IRS auditor cutting an audit short when the taxpayer produced the tax diary and associated receipts!
There are several tax diary systems available for purchase, like the one available from Corporate Office Services, Inc. or you can find several versions on the internet, like the one available from Doug Sevy’s website. Whichever you choose, make sure to use it regularly. It could save you a lot of money if you ever have to face the IRS in an audit.