Could your tax record keeping withstand an audit by the Internal Revenue Service?

When it comes to defending their tax deductions, most self-employed taxpayers have adopted a quasi-standard business practice they think will keep them in general compliance and under the radar of the IRS, without ever delving into the actual requirements to which the feds will hold them in the event of an audit.

Maybe you keep a daybook and know to collect receipts when you travel on business. Perhaps you retain your bank and credit card statements to support your deductions and your 1099s to verify business income.

But could your records actually hold up under an IRS audit?

As far too many have found out the hard way, the answer is: probably not.

"The laws say no records, no deductions. I think they're pretty strict about that," says Anne Christensen, professor of accounting at Montana State University. "There are certain standards for keeping these records, and if you don't meet the standards, they don't have to allow the deductions. It depends on the particular agent and circumstances as to how understanding they'll be."

Nobody, not even the IRS, requires you to have an accounting degree or keep your books the way a CPA would. But when it comes to defending yourself in an audit, the burden of proof is fully upon you to turn up the goods -- ledger entries along with such supporting documents as cash register receipts, bank deposit slips, bank and credit card statements and canceled checks.

Claim more than you can substantiate and not only do you risk having your deductions disallowed, you'll probably be slapped with a penalty for negligence -- 20 percent of the understated amount is typical -- as well as interest on the claimed amount. If you grossly underreport your income or overstate your expenses, you could be looking at a civil fraud penalty of up to 75 percent of the tax amount.

"The agent would look at the facts and circumstances involved and take these into consideration," says IRS spokesman John Lipold. "It's important to have something that can demonstrate the purpose and the details around whatever the deduction was."

Audit-proof your tax records
Source: Bankrate.com
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The red-flag zone
That said, not all deductions are equal in the eyes of an IRS examiner. Certain deductions, including business travel and entertainment, or T&E, business gifts, listed property such as cars, computers and cell phones, gambling losses and charitable contributions require more documentation than such write-offs as postage and office supplies that are less prone to abuse.