Answer to the Ultimate Question of Life, the Universe, and Everything (So long as Life, the Universe, and Everything just means “taxes”)

If you’ve read Douglas Adams’ 1979 novel The Hitchhiker’s Guide to the Galaxy you’ll be familiar with the Ultimate Question of Life, the Universe, and Everything and its answer: 42. If most of the words (and the answer) don’t mean anything to you, get yourself over to your nearest Half-Price Books and pick up a copy.

The good news is that, while 42 is an entirely unsatisfactory answer to the ultimate question of the universe, in the universe of tax I think we have a pretty profound and straightforward answer to most any problem: documentation!

A very repetitive theme we see in tax court cases is the disallowance of deductions when the taxpayer can’t provide support for them. While this may seem like common sense - no proof no deduction, it’s still a frequent occurrence.

This is actually a VERY common question I see on flashy tax-social media posts - how will the IRS prove “insert silly deduction here” isn’t actually a deduction? Well, because they don’t have to - you do.

Per the Courts - “The Commissioner's determination is generally presumed correct, and the taxpayer bears the burden of proving the determination is in error. Rule 142(a). The taxpayer bears the burden of proving that he or she is entitled to the deduction claimed, and this includes the burden of substantiation.”

So what do you need to do to prove it? I suggest keeping documentation that answers the who/what/when/where/why questions of a deduction. Let’s say for example you took a business trip - this what that would look like for documentation:

Who: Me (a business owner)

What: A trip to an accounting conference (documentation support - receipt of conference ticket)

When/Where: June 5th-8th, 2023 Las Vegas Nevada (documentation support - receipt of plane ticket)

Why: Continuing Education & Networking (documentation support of Continuing Education Credits received, receipt of networking meals with colleagues)

In this example, this was a deduction for a business owner, which means we also have to show that this trip is both ordinary and necessary in our regular course of business. An accountant, going to an accounting conference for continuing education is an expense that the IRS would expect someone in our industry to have. But what if we changed the facts - and instead of attending an accounting conference, I attended a beauty industry conference (assuming I do no accounting work in this industry) - that deduction would no longer be applicable to me because it’s neither ordinary or necessary for my line of work.