Summary:
Internal Revenue Service disallows deductions and increases taxes if taxpayer's records are inadequate.

Bad things happen to good taxpayers who don't keep adequate records. The first bad thing is the Internal Revenue Service disallows their deductions.

But what records are adequate? The law doesn't give an adequate answer. As for expenses, records should usually be sufficient so an agent can determine purpose and amount. A receipt or invoice showing description and cost plus a canceled check or credit card charge prove purpose and amount. But this isn't always sufficient. Sometimes more information is necessary; in other times less is available. Court cases give clues on which records are adequate and which are inadequate in particular situations:

Bad Debt: John and Marjorie Sexton didn't get a bad debt deduction because they had no dunning letters, no attorney bills, no other records showing collection efforts.

Business: The Wellington restaurant had not retained its cash register tapes or guest tabs, only summaries. The records were inadequate.

Office expenses: Randall Bishop kept a daily planner book and VISA card receipts. The daily planner showed business purpose and receipts proved payment. But only four business purposes matched VISA receipts. He could deduct only the four expenses.

Employer: Robert L. Ellis worked for Atlas Van Lines. He deducted $39,300 for cash wages he said he paid three people who helped load and unload furniture. He lost the deduction because he had no logbooks or other records identifying employees or hours or days they worked.

Travel and Transportation: Courtney F. Smith Jr., traveling lecturer, kept a contemporaneous log of business travel. He kept a personal calendar showing speaking engagements, letters announcing lectures to the public and stacks of newspaper clippings on his talks. He used a road map to measure the distance between cities. And from this, he showed date, mileage and business reason. With this information and the IRS standard mileage allowance, he got the deduction.

University professor G. Kent Stearns traveled within New Orleans giving lectures, attending seminars and doing other scholarly things. Mileage reconstruction based on an appointment calendar was adequate because local transportation doesn't require as much substantiation as travel to other cities does.

Meals and entertainment: Records of social meals and entertainment expenses should show date, time, those attending and business purpose. An example of entertainment would be a baseball game.

Business meals have a business purpose as opposed to social or personal. They are not subject to the rigid entertainment rules if they occur in surroundings conducive to business discussion, and the taxpayer or employee is present. After a business meal, take a moment to write on your copy of the credit-card slip names of people with you and nature of the business conversation.

Donations: With weekly church donations, prepare a log or other contemporaneous record. Even without this, IRS audit guidelines now sometimes permit modest deductions of unverified amounts for weekly religious contributions, door-to-door and office solicitations.

Casino gambling: After each day write down the date, location, amount wagered, type of wager, winnings or losses and names of people with you. If you can, support this with canceled checks showing the money you took, expenses and a bank deposit slip showing money remaining. Sometimes this is impractical, but do the best you can. Remember, report all winnings, not just those reported by the casino to the IRS.

Racetrack: William H. Green arrived at the Tax Court with $23,680 of losing tickets to offset racetrack winnings. The court allowed him to deduct only $2,000. The judge suspected Green had picked up tickets off the racetrack grounds because they bore heel marks.

(More at IRS Audits)