What documents are necessary to prove deductions?


P

Puffin

Most of my payments are though Billpay. There are no cancelled
checks; all I could do is print out an online bill history. Is that
adequate? If not, how is it handled?
My bank does not return checks, only has 5 months available online,
and charges $5 each for copies; so I don't want to get any more than
is essential.

My biggest deduction is investment management fees. Will account
statements be adequate? There really aren't any more documents.

Second biggest is real estate tax. Are bills adequate (some are also
receipts showing payment, some are not) or do I need checks also?

Third biggest is medical insurance. I don't have the bills, but have
a statement from the provider showing what I paid him; all payments
were billpay. Adequate?

Then there is prescriptions. I have a printout from the drugstore
showing what I paid. Adequate?

For medical copays I have the sheets I get from the insurance company
showing my copay. And checks if necessary, but the check copies will
cost way more than $20 copay deductions are worth.

And finally charitable contributions. I have receipts; do I need
checks also.

Thanks much
 
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R

removeps-groups

First, please read

Publication 552, Recordkeeping for Individuals
http://www.irs.gov/publications/p552/index.html
Most of my payments are though Billpay.  There are no cancelled
checks; all I could do is print out an online bill history.  Is that
adequate?  If not, how is it handled?
A report of bank transactions is usually not sufficient.

My biggest deduction is investment management fees.  Will account
statements be adequate?  There really aren't any more documents.
Yes, account statements are probably good enough. The account
statement should show the amount due for investment management fee as
well as the payment for investment fee. For example the Feb/2009
statement would show that you owe $400 investment management fee for
February and also that you paid the $390 for January. Only the
amounts paid during the year are deductible, so the Dec/2009 fee which
is paid in Jan/2009 is not deductible.

Or if you want to save paper, ask the company to send you a summary of
investment fees paid for the year. Just be sure they don't charge you
for this service.

Bank records such as bill pay line items, canceled checks are OK as
backup documentation.

BTW, are you in AMT? This is usually line 45 on page II of 1040. If
yes, then the deduction for investment expenses is likely not allowed.

Second biggest is real estate tax.  Are bills adequate (some are also
receipts showing payment, some are not) or do I need checks also?
By bill do you mean the invoice that says stuff like home value 500k,
tax $7200, with a breakdown of taxes and special taxes? Yes, this is
probably good enough. Of course, you need proof that you actually
paid the bill, but your bank statements only go back 5 months. You
can attach a statement saying your bank charges you $5 for retrieving
past checks, and there are no liens on the house right now, which
means that the amount was paid. But then again, that just proves the
amount was paid, not that it was paid in 2009. And what if you paid
your 2008 taxes in 2009, or your 2010 taxes in 2009? For these you
would need the check images as well as property tax bill. You can
probably get this information from your property tax office. Just ask
them for a list of amounts received in 2009.

Third biggest is medical insurance.  I don't have the bills, but have
a statement from the provider showing what I paid him; all payments
were billpay.  Adequate?
Does it show the date, type of service, amount you owe, amount you
paid? It may also show total amount, insurance negotiated amount.
Then there is prescriptions.  I have a printout from the drugstore
showing what I paid. Adequate?
Does it show the date, medicine, and amount you owe, amount you paid?
It may also show total amount, insurance negotiated amount.

Did you have FSA? If yes, the amounts paid by FSA are not deductible.
For medical copays I have the sheets I get from the insurance company
showing my copay.  And checks if necessary, but the check copies will
cost way more than $20 copay deductions are worth.
Does the medical expense sheet above include the copay in the amount
you paid? If yes, then you don't need the sheets. If no, then you
need the sheets. Just attach a note saying that your bank charges you
$5 for old checks and it's too expensive to get them. Then say that
your account 1234-5678 with each health provider is in good standing
and this proves that all bills have been paid.

As with real estate, checks along with invoices are more powerful
because you can prove that you paid a 2008 expense in 2009

And finally charitable contributions.  I have receipts; do I need
checks also.
What do you mean by receipt? Does it say "Dear XXX, Thank you for
your donation of $$$ on dd/mm/yyyy"? If yes, that is sufficient.
Canceled checks are backup documentation.
 
P

Puffin

Publication 552, Recordkeeping for Individualshttp://www.irs.gov/publications/p552/index.html
Thanks, that was exactly what I needed.

By billpay I mean an online service with my bank that pays my bill
with a transfer from my checking account.
It is pretty much a EFT.
552 says a bank statement is adequate for EFT proof if it show the
payees name, which mine do.
So a bank statement is good for billpay, right? That helps a lot.

The bank statement doesn't show the check's payees name, so I guess
they are not adequate for checks.
How about if I have a receipt or statement from the payee referencing
the check number, which is on the statement?
Does it show the date, type of service, amount you owe, amount you
paid?  It may also show total amount, insurance negotiated amount.
I mean what I paid for the medical insurance. I buy my own.insurance.
I did not save my invoice and the company I buy my insurance from
cannot reproduce them.
However they did give me a statement showing I buy insurance from
them, and list of payments.
What do you mean by receipt?  Does it say "Dear XXX, Thank you for
your donation of $$$ on dd/mm/yyyy"?  If yes, that is sufficient.
Canceled checks are backup documentation.
Yes, a letter like that. Then I can skip the check? $5 is alot to
prove a $50 contribution.
 
R

removeps-groups

http://www.irs.gov/publications/p552/index.html

Thanks, that was exactly what I needed.

By billpay I mean an online service with my bank that pays my bill
with a transfer from my checking account.
It is pretty much a EFT.
552 says a bank statement is adequate for EFT proof if it show the
payees name, which mine do.
So a bank statement is good for billpay, right?  That helps a lot.
The EFT statement is usually not sufficient because it doesn't say
what the service is for. The publication does say "You also need to
keep documents, such as receipts and sales slips, that can help prove
a deduction". However, the IRS is often reasonable and will accept
it. If they request the real invoices, receipts, etc then dig it up.
The bank statement doesn't show the check's payees name, so I guess
they are not adequate for checks.
How about if I have a receipt or statement from the payee referencing
the check number, which is on the statement?
This sounds fine to me.

I mean what I paid for the medical insurance.  I buy my own.insurance.
I did not save my invoice and the company I buy my insurance from
cannot reproduce them.
However they did give me a statement showing I buy insurance from
them, and list of payments.
Perfect.




Yes, a letter like that.  Then I can skip the check?  $5 is alot to
prove a $50 contribution.
Yes, you can skip the check.


The IRS is likely asking you to back up your deductions because they
are too high. I've never had to deal with this personally. I do have
charitable deductions but they are small. I don't hear people with
property tax deductions being bothered either as it's pretty
standard. The IRS might be after your investment management expenses
which you said is the highest deduction, and it's rare to see this
deduction as only the amount above 2% of your AGI is allowed. So may
provide the full details for this.



At ETrade Bank, they have records going back more than one year. So
maybe it's time to change banks :). If enough people change or
threaten to change, the bank will increase the time they keep
records. 5 months is just too short, but I think some big banks are
like this.
 
P

paulthomascpa

Puffin said:
By billpay I mean an online service with my bank that pays my bill
with a transfer from my checking account.
It is pretty much a EFT.

It might come out of your account that way, but I get paid by some clients
in that manner, and I receive a check in the mail. I suspect that unless
you have provided the necessary routing and account information for your
creditors, they are getting checks too. And even if there was some
electronic funds deposited, there would have to be sufficient information
for the creditor to associate it with your account.

Oh yeah, it's out of your account days before payment is received by the
creditor.
 
A

Arthur Kamlet

Yes, a letter like that. Then I can skip the check? $5 is alot to
prove a $50 contribution.
I have a different opinion. I believe that while the letter from the
charity is very good, and if over $250 is required, along with a
statement of Return Value, the check copy might be requested by the
IRS, and I have seen that happen even when there's a receipt.
 
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B

Beena Agarwal

I have a different opinion.  I believe that while the letter from the
charity is very good, and if over $250 is required, along with a
statement of Return Value, the check copy might be requested by the
IRS, and I have seen that happen even when there's a receipt.
Actually you're right because the charity could be lying. Maybe
someone sets up a charity and write letters for amounts that were
never received. Having checks makes everything crystal clear.
 
P

paulthomascpa

Beena Agarwal said:
Maybe someone sets up a charity and write letters
for amounts that were never received.



It ain't cheap to set up a charity and get the 501(c)(3) letter from the
IRS.
I don't see anyone doing that for a few bucks in writeoff.
 
P

Puffin

Actually you're right because the charity could be lying.  Maybe
someone sets up a charity and write letters for amounts that were
never received.  Having checks makes everything crystal clear.
There is no limit to fraud. You can pay someone by check and have him
return the money; using the check as proof of payment.
You can type up fake invoices. There is no limit to what can be done,
especially with computer.
Only solution is to simplify the tax code; make less places to cheat.
Yeah, right.
 
S

Steve Pope

Beena Agarwal said:
On Apr 29, 11:58 am, (e-mail address removed) (Arthur Kamlet) wrote:
Actually you're right because the charity could be lying. Maybe
someone sets up a charity and write letters for amounts that were
never received. Having checks makes everything crystal clear.
Since some banks don't give you your check back anymore,
is there any value in photocopying the check before
you mail it?

Is there any value in a contemperaneous log of charity spending
through the year? Or evidence of mailing receipts?

Steve
 
D

dpb

Arthur said:
I have a different opinion. I believe that while the letter from the
charity is very good, and if over $250 is required, along with a
statement of Return Value, the check copy might be requested by the
IRS, and I have seen that happen even when there's a receipt.
If the routine is not return checks and its so expensive to get them I'd
wait until they asked specifically and weren't satisfied w/ the 501(c)3
acknowledgment. If it were a well-known or established local it would
seem likely they could be trusted to not do something that would
jeopardize there status, too and the IRS would recognize that. Then
again, who ever said there was any logic or common sense involved???

$0.02, etc., ...

--
 
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P

Puffin

Most of my payments are though Billpay.  There are no cancelled
checks; all I could do is print out an online bill history.  Is that
adequate?  If not, how is it handled?
My bank does not return checks, only has 5 months available online,
and charges $5 each for copies; so I don't want to get any more than
is essential.

My biggest deduction is investment management fees.  Will account
statements be adequate?  There really aren't any more documents.

Second biggest is real estate tax.  Are bills adequate (some are also
receipts showing payment, some are not) or do I need checks also?

Third biggest is medical insurance.  I don't have the bills, but have
a statement from the provider showing what I paid him; all payments
were billpay.  Adequate?

Then there is prescriptions.  I have a printout from the drugstore
showing what I paid. Adequate?

For medical copays I have the sheets I get from the insurance company
showing my copay.  And checks if necessary, but the check copies will
cost way more than $20 copay deductions are worth.

And finally charitable contributions.  I have receipts; do I need
checks also.

Thanks much
I have been working on this 10 days so far and have maybe 30 hours of
work and 200 documents. I expect I have another 20 hours and another
100 documents to go. And I still have to make photocopies of
everything and pay for canceled checks.
Can this possibly be right? If I had an accountant do it (who doesn't
know my records as well as I do) I would cost me more than $5,000.
If I wanted to tie up every single co-pay to an entry on my credit
card statements or canceled check it would probably be twice that. (I
am relying on the fact that I can lose half my deductions without
anything changing on my return)

All that is at stake is a $369 refund. My accountant says I can't
just concede it; that is asking for big trouble. I have to comply.
So, is this all right, or am I somehow horribly misdirected?
 
G

Gene E. Utterback, EA, RFC, ABA

Snipped
I have been working on this 10 days so far and have maybe 30 hours of
work and 200 documents. I expect I have another 20 hours and another
100 documents to go. And I still have to make photocopies of
everything and pay for canceled checks.
Can this possibly be right? If I had an accountant do it (who doesn't
know my records as well as I do) I would cost me more than $5,000.
If I wanted to tie up every single co-pay to an entry on my credit
card statements or canceled check it would probably be twice that. (I
am relying on the fact that I can lose half my deductions without
anything changing on my return)

All that is at stake is a $369 refund. My accountant says I can't
just concede it; that is asking for big trouble. I have to comply.
So, is this all right, or am I somehow horribly misdirected?
Sucks to get audited!

Your accountant is most incorrect about conceding. You can concede an issue
without admitting any wrong doing. In fact, if I were your accountant I
would have had this discussion with you at the beginning - how much time,
effort and money are you interested in spending in order to get $369?

I once recommended to a client that he simply pay the IRS the $1,200 they
were asking for, explaining to him that while the deduction was clearly
legitimate it was going to cost him MORE to defend it than it was worth. He
insisted on the fight and the case drug out for well over a year - around 16
or 17 months as I recall (it was almost 10 years ago). In the end I won - I
knew I would - but it cost the client over $5K in fees! To defend $1,200!
He had the money and I was happy to take it.

Now, if your total issue is $369 and you've already spent 30 hours of your
time and accumulated over 200 documents and you're still NOT DONE - YOU ARE
NUTS!

Your accountant should focus the auditor on the BIG ticket items, though I
can't imagine what they could be if the total at risk is just $369.

In addition to your brokerage statements, get a letter from your broker (on
letterhead) confirming the amount you paid in management fees. That should
suffice.

As should a detailed list of what you paid from the pharmacy.

Confirmation from the county treasurer that your real estate taxes for the
year in question have been paid should be sufficient.

If the auditor is being picayune about things, agree to disagree, ask for an
immediate assessment and take the case to appeals. Trust me, appeals
doesn't want to waste their time on $369 any more than you do - this case
should have taken 2 half days to resolve at most (with all the usual caveats
in place of course).

Good luck,
Gene E. Utterback, EA, RFC, ABA
 
P

Puffin

Now, if your total issue is $369 and you've already spent 30 hours of your
time and accumulated over 200 documents and you're still NOT DONE - YOU ARE
NUTS!

Your accountant should focus the auditor on the BIG ticket items, though I
can't imagine what they could be if the total at risk is just $369.
I don't have an auditor; I just have a letter from NYS saying that if
I don't provide comprehensive documentation on all my deductions they
will refigure my return omitting all unproven deductions.
I should get a $369 refund. If all my deductions were disallowed I
would owe $2,000 in tax. (it would not affect my Federal return!)

My accountant says that anything I do not document properly will be
disallowed and I can count on that. You apparently don't agree with
him... What do you think my response should be?

Anyhow, my wife alone has 45 medical copays of $20. It takes a lot of
documents and time to prove 45 copays. And my sons and I had another
50. Then there are 11 dentist bills, 15 charitable contributions;
well, you get the idea.

If they all have to be proven, then my figure for time and documents
is proper. If only the big ones need to be proven then it might be 5%
of that.
He expected if I proved the big ones (enough to avoid paying the
$2,000 in tax) but let them keep the refund because it wasn't worth
the effort for $369, than I could count on the same thing for 2007 and
2008, and future years when it might be more important.

It is an enormous waste of time for me, but state has the option of
just ignoring my submission rather than wasting time on processing
it. All they have invested is a letter; then can concentrate on
people who don't reply at all. It is maddening.
 
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G

Gene E. Utterback, EA, RFC, ABA

Puffin said:
I don't have an auditor; I just have a letter from NYS saying that if
I don't provide comprehensive documentation on all my deductions they
will refigure my return omitting all unproven deductions.
I should get a $369 refund. If all my deductions were disallowed I
would owe $2,000 in tax. (it would not affect my Federal return!)
Not so fast here - if NYS makes adjustments to your state return you are
obligated to file an amended Federal return to account for those same
adjustments at the Federal level. Just like if you were audited by the IRS
you'd have to file an amended return with the state.
My accountant says that anything I do not document properly will be
disallowed and I can count on that. You apparently don't agree with
him... What do you think my response should be?
HOLD ON HERE - if that is the impression I sent, please accept my apologies.
Perhaps I didn't read your post closely enough. I THOUGHT you were jumping
through all these hoops ONLY for a $369 issue. If the difference is closer
to $2,500 then it may be worth the work.
Anyhow, my wife alone has 45 medical copays of $20. It takes a lot of
documents and time to prove 45 copays. And my sons and I had another
50. Then there are 11 dentist bills, 15 charitable contributions;
well, you get the idea.
You could get the physician to give you a letter detailing the receipt of
these co-pays. That alone should be sufficient for NYS - or the IRS for
that matter.
If they all have to be proven, then my figure for time and documents
is proper. If only the big ones need to be proven then it might be 5%
of that.
He expected if I proved the big ones (enough to avoid paying the
$2,000 in tax) but let them keep the refund because it wasn't worth
the effort for $369, than I could count on the same thing for 2007 and
2008, and future years when it might be more important.
In my experience, whenever you can prove the BIG ticket items, it increases
your credibility and allows the auditor some leeway in allowing some
smaller, undocument items. Of course there is no guarantee.
 

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