Use Receipts, Not Statements
Author: Brad Howland
First Posted: Oct. 22, 2007
Credit card or bank statements are generally not adequate documentation of your expenses. You will do better in an income tax audit if you back up your expenses with receipts.
Many self-employed taxpayers mistakenly assume that they don't need to keep receipts, since they purchase everything with a credit card and save their statements. There are some items that you probably do need to use statements to document (i.e. the interest expense on a business credit card, or items purchased in a foreign currency), but everything else should be backed up with receipts.
Imagine the work an auditor must do to verify expenses from your credit card statements:
- It is often difficult to determine whether an expense item is personal or business in nature.
- The description lines on a statement are short and hard to decipher.
- Businesses often use nicknames for their credit card invoicing, making it even more difficult to figure out what an expense line is really for.
- The auditor must thumb through all your statements for the year to add up how much you spent in any one category, and he/she must suffer through this chore for each of your expense categories.
In the event of an income tax audit, you want it to be as easy as possible for the auditor to verify your expenses! Receipts, totalled up with a printing calculator, are the best way to document your expenses. All the auditor needs to do is thumb through the receipts and compare them to the printed tape. Anything that makes the auditor's job easier will be more likely to produce a successful outcome for you.