Tax Tip: Record The Source of All Deposits
By Sanford C. Botkin, CPA, Esq.President, Tax Reduction Institute

Too many times people have said at my seminars that they are 
worried about an audit because they do not have the receipts 
for the documentation taken. Unfortunately, there is more to an 
audit than worrying about documentation for deductions. They 
need to also worry about the income side as well.

IRS has recently instituted an extra type of audit procedure. 
Regardless of the type of audit, IRS now asks for all bank 
records and money market accounts for the year or years 
covering the audit. At first blush, this may seem strange.
If you were being audited for your automobile or travel 
expenses, why would IRS want to see your yearly bank 
records? The answer is that IRS is now checking all
taxpayers for unreported income.

IRS will match all deposits made into your bank accounts and 
compare the totals to your reported income. If the deposits 
exceed what you have reported as income, you'd better have a 
great explanation or IRS will hit you with "unreported income" 
on the difference.

You may be thinking, "wait a minute, not every deposit is 
taxable." This is quite true. Gifts and inheritances are tax-free. 
Reimbursements from insurance companies and by employers 
for properly accounted for business expenses are also tax-free. 
Most municipal bond interest is tax-free. I had a student who 
could never balance his bank account. His idea of balancing an 
account was to close out one account every six months and 
open up another one! I hope this doesn't apply to you! None of 
these items mentioned are taxable. However, unless you can 
clearly demonstrate that the deposits come from a tax-exempt 
source, IRS will construe your deposits as unreported income.

It is now necessary that you record and identify the sources of 
all deposits in your check register. If, for example, you receive 
a deposit as a commission check from X Company, the check 
register would read, "commission from X company." If you 
were to receive a reimbursement from your health insurance 
company, the check register would read, "reimbursement form 
X Health Insurance Company."

Last, but not least, for all non-taxable items, make a copy of 
the check that you received, and put it into a yearly file.
Thus, if you receive a reimbursement from you employer for 
business expenses that you gave an accounting for, you
should make a copy of the check that you received.

If you follow my advice, you will certainly have the peace of
mind of making any IRS audit less painful, and will make your
life a lot less taxing!

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This Tax tip came from Sandy Botkin's Tax Strategies For 
Business Professional series and his Tax Advantage System 
for Home-Based Business. Sandy is both a CPA and attorney 
and is a nationally syndicated columnist and lecturer on small 
business and home-based business tax and business issues. 
You can find out more about Sandy's products through his 
web site at http://www.taxreductioninstitute.com

He will also be posting answers to tax questions and other 
business and financial questions once a month in our 
new column, "Ask the Guru." You may write him questions at
mailto:sandytxman@aol.com