Record Keeping

Good record keeping is the key to audit-proofing your tax return.


Tax law requires you to “keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person [i.e., you] in any return of such tax or information.”1 In other words, the burden is on you to prove your tax return is accurate.


Under the Cohan Rule, named after the court case that established the rule, if a taxpayer can establish that he or she actually paid a deductible expense but cannot prove the precise amount, a court can estimate the amount.2


But the Cohan rule is at best a last resort, resulting in far smaller deductions that you could have gotten with good record keeping. Worse, for certain business expenses, the tax code imposes additional Substantiation requirements that supersede the Cohan rule. The additional requirements apply to:3



Travel Expenses



Entertainment Expenses



Listed Property expenses and use, including Automobile (and Other Business Vehicle) Expenses



Business gift expenses


Property transactions. Good record keeping is also vital for keeping track of your Basis in property, because your basis or Adjusted Basis is used for figuring, e.g., Depreciation and Amortization deductions, as well as gain or loss on property. (See Capital Gain or Loss.)



1           Reg. Section 1.6001-1(a). See also IRC Section 6001(a).

2           Cohan v. Commr., 39 F.2d 540, 543-544 (2d Cir. 1930).

3           IRC Section 274(d).