The burden of proof remains on the taxpayer, so keeping good records is smart to avoid pitfalls. Most taxpayers' audits are still substantiation audits, and the Internal Revenue Service Code still requires all taxpayers to keep adequate books and records to substantiate every item on their tax return. It is still general practice for the IRS to require taxpayers to bring in all of their records for review. If needed, the IRS can summons a taxpayer's records if the taxpayer fails to comply with the request. A negligence penalty of 20% of the tax attributable amount can be imposed if you fail to maintain adequate records.

Shifting the Burden of Proof

Certain conditions apply to shift the burden of proof to the IRS if your audit goes to court. Of course, the first condition is that the taxpayer maintains all records required by the Internal Revenue Code. Secondly, the taxpayer must produce those records to the IRS agent at the time of the audit.

Agents are placing greater emphasis on record production at the audit level since they are subject to later review and criticism if the taxpayer successfully gets the burden of proof shifted in a court case. Their best defense at any attempt to shift the burden is to establish that the taxpayer did not provide adequate records at the audit. The tricky part is that the IRS never clearly defines what "adequate records" are.

The IRS Code makes the broad requirement that the taxpayer keeps whatever records are necessary to substantiate each item on the tax return. As a general rule, you should keep original documentation to show who, what, when, why and how much. Checks, bills, invoices, and all third-party documents should be kept. Detailed journals and ledgers are usually a good sign of adequate record keeping. Maintaining good records will greatly increase your chances of prevailing in an IRS tax audit. The IRS may be friendlier but do not be fooled into thinking that anything will be different when substantiating your tax returns.