Reviews
Part of Business deductions rest on a test, not a category list
Review your business deductions by sampling lines and asking three questions
A business deductions review method: sample the lines that matter, ask three questions of each, and check both your own claims and a preparer's work.
If an examiner opened your return they would not read it top to bottom. They would pick the lines most likely to be wrong and ask for the support. Do the same before you sign, and the review of your deductions takes an evening rather than a week.
What to take away
- Review by samplingthe biggest items, the roundest, the ones that moved most since last year, and everything with a business-and-personal split.
- For each sampled item pull the record. If it is not there, the deduction is a question, not a claim.
- Review what was not claimed as well as what was.
- Whether a claim is allowed is the IRS's rule for your year, applied by a CPA or enrolled agent. This page is about whether the claim is supported.
Pick the lines
| Pick | Why an examiner would | What to pull |
|---|---|---|
| The five largest deductions | They carry the most tax | The invoices or statements, and the purpose |
| The five roundest numbers | Round figures are usually estimates | Whatever the estimate was built from |
| The five that changed most from last year | Movement needs a reason | Last year's figure and the story behind the change |
| Every line with a business share | The share needs a basis | How the percentage was arrived at, in writing |
| Vehicle, travel, meals and home | Historically the most contested categories | The log, the dates, the attendees, the measurements |
| Anything you cannot explain in one sentence | If you cannot, nobody can | The sentence, then the record |
That is usually twenty to thirty items. It is a manageable evening.
Which lines to pick
- Five largest deductionsinvoices and purpose
- Five roundest numberswhat estimate was built from
- Five biggest changeslast year's figure and story
- Every business sharewritten basis for percentage
- Vehicle, travel, meals, homelog, dates, attendees
- Anything unexplainable in one sentencethe sentence
Three questions per item
For every item sampled, answer three things from the record rather than from memory.
Three questions per item
Are all three answered from documents?
move on to the next item
put the item on the preparer's list
Did it happen, and who paid? A statement or receipt answers this. A category label does not.
Why is it business? A note made at the time answers this. Your recollection under questioning does not.
What share, and which year? A stated basis and a date answer this. A percentage that felt fair does not, and neither does the date the receipt was found.
Where all three are answered from documents, move on. Where one is not, the item goes on a list for the preparer.
Reviewing your own claims
Check your own assumptions with the eyes that made them, but borrow different ones, and read the return as a stranger's, as unkind as an examiner would be.
The business deductions overview describes what a deduction is worth. A useful reminder: removing a weak one costs less than you think, and defending it costs more.
Pay particular attention to the vehicle lines. If a per-mile figure was used, there should be a log; if actual costs were used, there should be both a log and the receipts. The mileage rates page explains why neither method works without the miles.
Reviewing a preparer's work
- Ask for the reconciliation from your ledger totals to the categories on the return. Every reclassification should be visible.
- Ask what was reclassified, and where it went.
- Ask what was left out, and why. The unclaimed list is where the preparer's judgment shows.
- Ask which items they would want more support for if asked.
- Compare to last yearwhat disappeared, what appeared, and whether the business changed to match.
- Check whether the preparer's questions were answered from records or from your best guess, because a guess you gave them is now a number they have used.
A preparer who can hand you the reconciliation in a minute has done the work. One who cannot has trusted the ledger, and the ledger is only as good as your memo lines.
What to do with what you find
- Support missingfind it, or drop the item. For a large item, ask before dropping.
- Split unclearderive a basis you could explain, write it down, and give it to the preparer.
- Year uncertainlist it. Which year it belongs in is a rule, and the preparer applies it.
- Something personal claimedremove it before signing. Removing it after is an amended return, and that is the expensive version.
If a line is questioned after filing, the IRS writes. Its page on understanding an IRS notice or letter explains what the letter asks for and how to respond. Every request in it is for a record, and the review above is the rehearsal.
What to do with findings
Finding
- Support missing
- Find it or drop it
- Split unclear
- Derive and write basis
- Year uncertain
- List it for preparer
- Personal claimed
- Remove before signing
Action
- Support missing
- Split unclear
- Year uncertain
- Personal claimed
Where to check
| Source | Use it for |
|---|---|
| The instructions for your return, for your year | What each expense line expects to see behind it |
| IRS Publication 334, Tax Guide for Small Business | The general test an expense has to meet |
| Your own ledger and receipts | The only thing that answers the three questions |
| A CPA or enrolled agent | Whether a supported claim is also an allowed one |
A review is a rehearsal, and the IRS describes what it is a rehearsal for on its page on how audits are selected and conducted. Nothing in that description asks for anything a good review has not already produced.
The federal business tax overview covers where the deduction lines sit within the return as a whole.
Common questions
Should I review everything rather than a sample?
If the sample turns up more than a few problems, yes, because the sample is telling you about the rest. If the sample is clean, it is probably a clean return.
The preparer says a deduction is fine. Do I still need the record?
Yes. "Fine" means allowed by the rule. The record is what proves the facts the rule is being applied to, and the preparer will ask you for it if anyone else does.
How long do I keep the records after the review?
For as long as the IRS says, which varies by what the record supports. The tax records overview explains how that period is set.
What if I find something wrong on a return already filed?
Ask a professional whether an amended return is warranted. Some errors are corrected, some are left, and some the IRS fixes itself. Do not decide alone, and do not wait.
