Records for All Money Received

Gifts, Loans, Transfers, or Transfers

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Failure to keep good records can result in a tax nightmare. In Kenneth Lee and Margaret Ihlenfeldt (T.C. Memo. 2001-259) the IRS convinced the Court that the taxpayer had unreported self-employment income. The Court did not believe that certain deposits to his bank account were loans (rather than taxable income) because the taxpayer had no documentation that would support the claim. On the other hand, the Court let the taxpayer to deduct more expenses against that income than the IRS allowed. The taxpayer was not able to deduct the bulk of his expenses because he could not produce any evidence supporting his claim.

It is very nearly impossible to overstate or over emphasize the necessity of keeping good and complete records of each and every deposit. The presumption by the IRS and the courts is that all money you receive is income and that you must prove otherwise. Follows is a quotation from a recent Tax Court Case that should emphasize the importance of these records:

U.S. Tax Court Memo. 2001-259

Petitioner asserts that the unexplained deposits are nontaxable income.

According to petitioner, those deposits are primarily the proceeds of loans which he received from financial institutions, friends, and family. We are unpersuaded that this is so. On the basis of our review of respondent’s analysis, in the light of the record as a whole, we sustain respondent’s determination on this issue. Petitioner has failed to prove it wrong.

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Solutions are dependent upon facts & circumstances, law and the objectives. These elements vary from one time to another, from one circumstance to another and from person or entity to another.

You must meet the IRS and Court expectations for proving you did not sell or work for the deposit:

Examples of non-taxable or "tax-free" deposits

Borrowed money

Gifts to you

Transfers from other accounts

Return of capital

Re-deposits of checks already included in income

Money repaid to you

Money previously drawn which you are re-depositing, such as ATM draws, etc.

Cash Advances from Credit Cards

Cash distributions you receive from partnerships (including public traded partnerships)

Cash distributions you receive from LLC

Cash from an inheritance

Money from tax free instruments such as municipal bonds

Interest from certain savings bonds if you have previously reported interest as income

Interest from other bonds in which you "paid for" the interest (certain accrued interest, or other instances)

Installment sales may have a taxable portion that dos not match with the money deposited

Federal income tax refunds

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Then you must keep information and documents acceptable by the IRS and the Courts to prove your assertions about exclusion from income taxation are correct: Here are some examples:

Separate deposit slips for items that are not income with referrals to the evidence proving it is exempted

Promissory note as either the borrower or the lender

Copy of the check you receive from a lender showing that the check is a loan, and not a payment to you for services or property

State of a person making a gift to you which identifies the gift

Statement from attorney or administrator of an estate identifying your inheritance

For any "re-deposits" a reconciliation with the original drawing

Transfers - documents showing the disbursing account and the receiving account

Other documents, reconciliations or worksheet too numerous to identify here

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