How can you make your deductions stick, especially in the difficult areas the IRS likes to argue about, such as overnight travel, business entertainment, and deductible mileage driven in your personal car? The answer is recordkeeping, which is, as I once characterized it in a tax guide I was writing, "a charm to ward off evil."
The point is this: if you can solidly document all the deductible expenses you incur, then there's not a damn thing they can do about it. Of course, who among us is the perfect "number counter"? I mean, if the system and the people who run it had their way, we'd go through life with little note pads around our necks, diligently noting every expenditure made. Then, at the end of the year, that amount could be allotted to us for expenses, and the rest could be kept by the state. But I digress.
The people who propose the tax laws—often the Treasury Department and its functionaries, including the IRS—know that most people are unwilling or unable to put out the energy and attention required for accurate daily records. Most of us are too busy working and living our lives to pay constant attention to the latest tax directives. That's why the notion of "reasonable estimates" crept into the tax law over the years, even receiving Supreme Court endorsement.
But the IRS doesn't like that, of course, and when the 1984 "tax reform" bill was passed, special attention was paid to a new type of tax-raising ploy. The new law demands that everyone have detailed "adequate contemporaneous records" in order to claim any deduction in certain areas: travel expenses, including food and lodging; business entertainment expenses; business gifts; and "listed property" expenditures (currently including automobiles and other transportation equipment, entertainment or recreation materials, and computers). The "listed property" provision is most troubling: the law provides that the IRS can, "by regulation," put anything it wants to on the "list."
In other words, the number counters won a victory. If you don't keep those detailed records, you can't get an investment credit and you can't take either depreciation or the expense itself, whichever the case may be.
What precisely is required in such records? They have to show (1) the time and place of the expense or use of "listed" property (and "contemporaneous records," folks, means each use), (2) the business relationship to yourself of the person using the property or being entertained, (3) the business purpose of the expense or property, and (4) the amount of the expense or the cost of the property.
In addition, the number counters put tax preparers on the hook by providing that the person filing the return must be advised of the "substantiation" requirements. And preparers must obtain "written confirmation from the taxpayer" that the records have been kept. If you can't assure your tax specialist, in writing, that you have such records, then he or she isn't allowed to sign the tax return. And the law already required that all returns be signed by the preparer who did them. A nice little Catch-22 there, effectively turning private tax professionals into collection agents for the state.
So all right. Everyone take 15 seconds to moan and groan and gnash your teeth.
Now. You're reading this around the beginning of 1985. The above rules went into effect as of January 1, 1985. Go out and get yourself a business calendar or a business mileage log (if that's what you need) right now. And start using it. Every office supply store in America has a plentiful selection. Especially this year. Start to use them, each and every day, documenting each and every business expense, each and every use of each and every "listed property." Go write down your beginning-of-year mileage on your car right now. Get in the habit of keeping total business records!
The number counters want more number counters? Let's give them number counting till it's coming out their ears. It doesn't matter how you do it, whether with a calendar, a notebook, a mileage log, little slips of papers tossed in a shoe box, or on the margins of your Wall Street Journal. I read "adequate contemporaneous records" as being anything that contains the required information, written at or near the time of the expenditure or use.
Now, I've been thinking about this ugly little trend and what it could mean. The obvious reason for such rules is this: the state wants more tax money. For those of us who tend toward conspiracy theories, it could mean that Deep Mole supply-siders let this one pass through unmolested. Why? Because they want the tax system to become ever more onerous and detested, not only for the general citizenry but for the accountants and tax lawyers and tax preparers, too. Make 'em mad! And scared! Because 1985 will witness a titanic struggle over totally tearing down the existing tax system, to be replaced with something simpler and more rational, probably a "modified flat tax" of some sort. So it can't hurt to turn the system further against those who most benefit from it, the tax professionals.
Results? I see three main possible reactions to the new records rules and demands: (1) more taxes will be paid, because productive people won't be able to keep up the attention necessary to keep the demanded documentation; (2) less taxes will be paid, because those inclined to stay within the system will master recordkeeping to nail down deductions and those not inclined to put up with it will further swell the already exploding subterranean economy; and (3) the whole system will have to be scrapped as a result of increasing outrage from virtually everyone not working for the IRS.
I like that last possibility a lot, and in fact that's probably what we're going to see during 1985. The problem is going to be that the "flat tax" won't really be "flat" at all but will penalize people who work hard, just as the present system does, only a little less so. Furthermore, the new tax code will be sold to the American people as a "great simplification," while people like Tip O'Neill, Robert Dole, and Teddy Kennedy will try to make it the greatest ripoff in state-loving history. But that's another battle, and one we should all turn our attention to.
Tim Condon is an attorney and tax specialist practicing in Florida.
This article originally appeared in print under the headline "How to Win the Paper War".