By: A.J. Cook


Suppose you get that dreaded letter from the Internal Revenue Service: "Your tax return is being examined . . ."

Are you ready? Do you have records to support your income and deductions? In three cases, the courts tell us when records should be prepared, what they should include and who is responsible if the IRS loses them.

Inez Meilak worked at Sandomenico's, a swanky restaurant in New York. When she failed to produce records to support her tip income for the previous two years, an IRS agent estimated the amounts. From interviews and restaurant records, he estimated her tips ran 12 percent of charges to her customers.

The waitress appealed. At the trial she presented sheets of paper with tip figures that she wrote, supposedly daily or every other day, over the years examined. The judge said the records looked like they were written in one sitting. Records for tip income should be written contemporaneously. She also relied on three notebooks recorded supposedly over the same period by employees. The judge challenged these also saying the copyright date on the notebook was a year after the examination period. She explained these must be copies. She guessed the originals got wet because of leaks in the restaurant roof.

The judge accepted the IRS estimate. The waitress was served a negligence penalty, and her taxes were increased $9,436.

In another case, John and Marjorie Sexton of Hopkinsville, KY., lent $49,000 to relatives. Later realizing they weren't going to get it back, they claimed a bad debt loss.

The IRS disallowed the deduction because there were no dunning letters, no attorney bills and no other records of their collection effort. Without these, the IRS usually treats uncollected family loans as gifts. The court affirmed the agency's position.

• If there are no independent records - like with tips, gambling and weekly church donations - you should prepare a log or other contemporaneous record. Now IRS audit guidelines permit modest deductions of unverified amounts for weekly religious contributions, door-to-door or office solicitations, etc.
  
• When you purchase expensive items, keep the invoices. They can be valuable in supporting a later casualty loss. For example, in the case of a theft, these and the police report will be good supporting records.
  
• A contemporaneous log and an appointment calendar will probably support in-town travel. Local transportation costs are exempt from the harsh out-of-town travel rules.
  
• If records are lost, you should reconstruct a paper trail: check stubs, credit card receipts, copies of suppliers' invoices, canceled checks or even estimates based on prior years' deductions.
  

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
This information is not intended for use without professional advise.
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Released 5-19-97