Want to Win in an Audit? You Gotta Have "Credible Evidence"

I have written posts recently about burden of proof in tax cases, but I wanted to discuss it today, along with a couple of examples of why you must have credible evidence for your deductions, to shift the burden of proof. First, the law:

Burden of Proof in a Tax Case
When a tax case gets to the Tax Court, the Court presumes that the IRS's determination is correct. In other words, the Court figures the IRS has gone over it thoroughly and that the evidence from the taxpayer is either non-existent or deficient. This is an important statement, because it shifts the burden of proof to the taxpayer to prove that the determination is in error. But...

the burden of proof on factual issues that affect the taxpayer’s tax liability may be shifted to the Commissioner if the taxpayer introduces credible evidence with respect to the issue and the taxpayer has satisfied certain conditions. Sec. 7491(a)(1).

So, if you can produce "credible evidence" for your deductions, for example, you can persuade the IRS, or the Tax Court, that your deductions are correct.

What is Credible Evidence?
If you want to shift the burden of proof to the IRS, you must have credible evidence of your deductions. Having "credible evidence" means you must have receipts, canceled checks, or bills, to support your expenses. For certain types of expenses, like travel, entertainment, gifts, and auto expenses, your "credible evidence" must be even more detailed.

Keeping Good Records
Keeping good records is not an option in a business; it is a necessity. You can't wait until the IRS knocks on your door to start gathering up your records. Capture your records as you go along, so you don't get caught in an audit.