At Tom Vignali CPA, Inc., we were recently engaged by a new client to assist with their previous and current tax filings. They had self-filed their 2017 returns and prepared their 2018 financial statements and returns. Upon an initial review, it became evident that there was a significant lack of receipts, travel logs, and wage filings. We advised that these receipts and wage reports were required for proper documentation for tax filings. We also noted that the lack of documentation would be detrimental if an audit were ever performed. The client indicated that this is how he had always filed his returns and refused to comply with the recommendations made.
IRS comes calling
As expected and anticipated, the client received a letter from the IRS requesting a meeting for an audit. The frantic client called, requesting that we accompany him to the audit. We agreed to be present as a professional courtesy, but could not vouch for the data he had personally reported in the returns he had filed.
During the scheduled audit, the auditor began by asking about the reported “wages” for 2017. He asked for payroll records, W-2’s, or 1099’s. The client stated that he had none, and that he had written out company checks for the full amount of wages to each individual. There were no withholdings and no 1099’s or W-2’s. The wages as reported were disallowed.
The auditor moved on to the Meals and Entertainment line item and requested receipts and records. The client indicated that he had no receipts, no records, and could not even provide a calendar record of the meetings or who he had met with. These expenses were disallowed.
The auditor moved on to the Travel and Mileage expense line item, requesting a record of all of these expenses and a mileage log. The client indicated that he did not have any of the receipts for travel expenses, and could not provide an accounting of starting and ending mileage for any of his vehicles. The Travel and Mileage expenses as reported were disallowed.
Disallowed deductions – ouch!
Without addressing any of the other expenses listed in the 2017 returns, the auditor performed the same process for the same three line items in the 2018 returns. After receiving the same non-compliant responses for each, the auditor stopped and performed some initial financial calculations. The result was that almost $65,000 was disallowed between both returns. Ultimately, $80,000 was added back between both returns, resulting in a $15,000 tax liability plus $5,000 for non-compliant filings. The auditor explained his calculations, knowing full well that this was a stunning amount to be disallowed and owed by the client. The auditor was extremely gracious by not extending his efforts into various other line items that probably would have resulted in increasing the disallowed amount.
After the meeting was over, the client lamented that he should have followed the advice we had given him. He was now facing a huge tax liability, which could have been easily avoided had he followed our recommendations. Needless to say, the client now documents every expense and files all of the relevant receipts to support these expenses.
Save those receipts
When filing tax returns, we seriously recommend that the proper receipts and supportive documentation be made available to support the deductions listed in the returns. It is critical to have the proper documentation for every expense you report!
If you would like to further discuss this issue or any other accounting issues, don’t hesitate to contact us at: Tom Vignali CPA, Inc.
Contact Us:
Thomas W. Vignali CPA Inc.
118 Point Judith Road
Narragansett, RI 02882
T: (401) 415-0798
tom@tomvignalicpa.com
www.tomvignalicpa.com
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