Circumstances are beyond human control, but our conduct is in our own power. Benjamin Disraeli
It is a simple analogy. As long as you obey the speed limit, you remain in control. The minute you exceed the speed limit, even by one single mile an hour, you turn control of your life over to the peace officer who has his radar gun trained on you. Yes, the rumor is that the police will allow you to travel a few miles per hour over the speed limit. But maybe the officer had a bad night, or maybe you are driving a red car. So just maybe he decides to use the minor infraction as an excuse to pull you over and ticket you. He can do so because you gave him the power.
I use this analogy in my consultations with clients concerning the IRS. There are standards of documentation that the IRS has developed over the last hundred or so years based on the code, regulations, various pronouncements and case law. These standards are the very minimum that you can strive to meet and still insure that you maintain control over your destiny in an audit. True, the IRS has given auditors "discretion" in cases where taxpayers do not meet the standard, but again you are turning control over the decision to a person who is human and subject to the same imperfections as we are.
I know most of the auditors in our area and I know from personal experience that they are great folks that try to be fair. But when confronted with substandard (or no) documentation, it becomes a matter of negotiation. In the negotiation, the auditor is motivated by the desire to maximize the amount if tax collected by the government. He or she is also motivated by a desire to both satisfy their supervisor and still avoid having the taxpayer appeal the audit.
My motivation as the taxpayer's CPA is to eliminate all adjustments so my client doesn't have to write a check at the end of the audit. If I can't accomplish that during the audit, it is my job to try to lay the groundwork for an appeal or a trip to tax court. Regardless of motivation, though, the difference between a costly audit and a no-change audit is almost always the quality and completeness of the documentation. When the documentation is good, I am in control in the audit. When it is not, the auditor is in control.
Given all of this, what are the standards of documentation for business expenses? Generally the standard requires that you supply proof that the expenditure is an ordinary and necessary expense for the business. This includes anything that supports the taxpayer's assertion that the business needed the expense.
Given the above, here are two instances where there is specialized documentation that you should keep in mind:
The easiest way to satisfy the IRS is via a mileage log. The downside is that you give up the ability to depreciate your vehicle.
Meals and Entertainment:
In the case where actual expenses are used (as opposed to the per-diem method), the receipt MUST be detailed, contemporaneous and must have the date, amount, who you were with and the business purpose (the old who what where when and why).
Remember, holding on to receipts is only part of the story. The rest of story is told by a combination of your actions, the subsidiary documents that surround the transaction and my ability, using the documentation to tell the whole story to the auditor. That's what gives you control.