What documentation is required to support an itemized deduction claim in case of an IRS audit?

To support an itemized deduction claim in the event of an IRS audit, a taxpayer must maintain and, if requested, provide documentation that substantiates both the amount and the nature of each deduction. The specific documentation required depends on the type of expense being deducted, but the general principles and heightened substantiation requirements for certain deductions are as follows:

1. General Recordkeeping Requirements

• All taxpayers must keep records that are sufficient to establish the amounts, dates, and business or personal nature of each expense. This includes canceled checks, receipts, invoices, bank statements, and other written evidence that shows the payee, amount, date, and description of the item or service received.
• The records should be kept for at least three years after the date the return is filed, as this is the standard period during which the IRS may audit a return. In cases of substantial underreporting, records should be kept for up to six years.

2. Substantiation for Specific Itemized Deductions

A. Medical Expenses

• Receipts from Providers: Must show provider’s name, date of service, description of treatment, and amount paid.
• Itemized Statements: Should detail each service or procedure and corresponding charge.
• Proof of Payment: Bank statements, credit card records, or canceled checks showing the transaction date, recipient, and amount.
• Insurance Explanation of Benefits (EOB): To verify out-of-pocket costs.
• Doctor’s Notes/Prescriptions: Required for expenses not automatically considered medical care (e.g., prescribed fitness programs, certain OTC medications).
• Travel for Medical Care: Maintain a log with dates, destinations, and miles driven; hotel receipts for lodging; and documentation of the medical purpose.

B. Taxes Paid (State/Local Income, Real Estate, Personal Property)

• Real Estate Taxes: Keep property tax bills and proof of payment (canceled checks, bank statements).
• State/Local Income Taxes: Retain W-2s, pay stubs, or other documents showing withholding; for estimated payments, keep payment vouchers and canceled checks.
• Personal Property Taxes: Maintain tax bills and proof of payment; the tax must be based on value and charged annually.

C. Mortgage Interest

• Form 1098: Issued by the lender, showing interest paid.
• Loan Statements: If Form 1098 is not available, keep lender statements and proof of payment.

D. Charitable Contributions

• Cash Contributions (under $250): Canceled check, bank record, or receipt from the charity showing the name of the organization, date, and amount.
• Cash Contributions ($250 or more): A contemporaneous written acknowledgment from the charity stating the amount, whether any goods or services were provided in exchange, and a description and good faith estimate of the value of any such goods or services.
• Noncash Contributions (property): Receipt from the charity with the name, date, and description of the property; for contributions over $500, additional records on acquisition and cost basis; for contributions over $5,000, a qualified appraisal and Form 8283 are required.
• Payroll Deductions: Pay stub or W-2 showing the amount withheld and a pledge card from the charity.
• Out-of-Pocket Expenses (volunteer work): Keep receipts for expenses and a statement from the charity describing the services provided.

E. Casualty and Theft Losses

• Proof of Loss: Police reports, insurance claims, appraisals, photographs, and receipts for repairs or replacement.
• Proof of Ownership and Value: Purchase receipts, appraisals, or other documentation showing the original cost and value before and after the loss.

F. Miscellaneous Deductions (e.g., Gambling Losses)

• Gambling Losses: Keep a diary or log of winnings and losses, including dates, locations, amounts, and types of wagers, as well as supporting documentation such as tickets, receipts, or Form W-2G.

3. Heightened Substantiation for Travel, Meals, and Entertainment (Sec. 274(d))

Certain deductions, such as travel, meals, and entertainment, are subject to strict substantiation requirements:- Travel Away from Home: Must substantiate the amount, time (dates of departure and return), place (destination), and business purpose for each trip. Receipts are required for lodging and for any expense of $75 or more (except for transportation where receipts are not readily available).- Meals and Entertainment: Must document the amount, date, place, business purpose, and business relationship of persons involved. The 50% limitation generally applies to meal expenses.- Gifts: Must document the cost, date, description, business purpose, and business relationship of the recipient.

Records should be made at or near the time of the expense and supported by documentary evidence (receipts, paid bills, etc.). If records are lost due to circumstances beyond the taxpayer’s control (e.g., fire, flood), reasonable reconstruction is permitted.

4. Best Practices and IRS Expectations

• Contemporaneous Recordkeeping: Records should be made at or near the time of the expense for maximum credibility.
• Written Records Preferred: Written records are given more weight than oral testimony.
• Summary Documents: Maintain a summary of all itemized deductions, categorized by type and date, to facilitate tax preparation and audit response.
• Digital Records: Scanned or electronic copies are acceptable if legible and complete.

5. Cohan Rule Limitation

The courts may estimate expenses under the Cohan rule only if some credible evidence exists that an expense was incurred and there is no specific statutory substantiation requirement. However, for deductions subject to heightened substantiation (e.g., travel, meals, entertainment, gifts), the Cohan rule does not apply, and deductions will be denied if the required documentation is not provided.

In summary: To support an itemized deduction claim, you must keep and, if audited, provide receipts, statements, canceled checks, and other records that clearly show the amount, date, payee, and nature of each expense. For certain deductions (travel, meals, entertainment, gifts, charitable contributions, and casualty losses), the IRS requires specific, contemporaneous documentation and, in some cases, written acknowledgments or appraisals. Failure to maintain adequate records can result in the disallowance of the deduction.

If you have a specific type of deduction in mind, please specify for more tailored documentation requirements.