You’re not worried about audits.
Your returns are filed on time. Compliance is being handled. You assume that if an auditor comes calling, you’ll figure it out then.
But here’s the reality: the audit isn’t when you build your defense. The audit is when you deploy it.
That defense lives in documentation – the contemporaneous records, organized support, and clear evidence that you took your tax positions intentionally, with solid reasoning, and in compliance with law. Most companies are underprepared on this front. They file returns without maintaining the documentation that actually defends those positions when questioned.
There’s a widespread assumption that tax compliance is handled by filing returns on time and paying taxes owed. But compliance and defensibility are different.
You can file a compliant return without having solid documentation backing up the positions on that return. Here’s what that gap looks like:
Tax positions are taken on returns without recording the reasoning behind them. No memo explaining the decision. No support for the interpretation used.
Support exists but it’s scattered across emails, spreadsheets, and various systems. When an auditor asks for documentation, companies spend weeks pulling materials from multiple sources.
Intercompany arrangements exist operationally – management fees are paid, cost allocations happen, but there’s no formal documentation, transfer pricing analysis, or clear record of business purpose.
Deductions are claimed on returns, but contemporaneous support for those deductions is minimal. Receipts exist, but documentation of business purpose is missing.
This isn’t because companies are hiding anything. It’s because documentation isn’t glamorous or urgent. It doesn’t drive revenue or solve operational problems. So it gets deprioritized. Until an auditor shows up. Then it becomes everything.
The IRS understands that perfect records don’t exist. They’re looking for intentionality.
Contemporaneous documentation demonstrates that a position was taken deliberately, with thought, and with reasonable support. It shows that the company understood tax implications and made conscious decisions.
Without it, you’re in a weaker position. If an auditor questions a position and you can’t produce contemporaneous documentation supporting it, you’re arguing “this position should be allowed” after the fact rather than “we took this position deliberately, with documented reasoning.”
The first conversation is much harder to win than the second.
Well-documented positions are defensible positions. They show auditors that the company paid attention, made intentional decisions, and backed those decisions with analysis. That changes the audit dynamic significantly.
Tax documentation is a system of records that support your tax positions and decisions.
Decision documentation
When significant tax decisions are made, document the decision and reasoning. Why was this structure chosen? What was the business purpose?
Contemporaneous records
Documentation created when transactions happen, not months later. If an intercompany arrangement is established, document it at the time. If a deduction is claimed, support it when claimed.
Supporting analysis
For positions involving interpretation of tax law, document your analysis. What statute applies? How do you interpret it? Why does that interpretation support your position?
Key agreements
Any formal arrangements – intercompany agreements, management fee structures, IP licensing, should be documented formally.
Organized records
All documentation should be organized and accessible. If an auditor requests materials, you should produce them quickly and completely.
The cost of poor documentation surfaces in multiple ways:
When you can’t produce support quickly, audits extend. More auditor time is spent. Your internal resources are consumed.
Positions that would be defensible with proper documentation become indefensible without it. Adjustments are made. Penalties are assessed.
In audits, you’re negotiating with tax authorities. Without documentation support, your leverage is weak.
During M&A or capital raises, buyers conduct tax due diligence. Poor documentation becomes a red flag that slows diligence and affects valuations.
The companies that approach audits with confidence aren’t those with the most aggressive positions. They’re the ones with the best documentation.
If your company hasn’t invested in documentation infrastructure, starting requires intentional process:
Establish standards: Decide what documentation will be maintained, how it’s organized, and who’s responsible for creating and maintaining it.
Assign ownership: Someone needs to own documentation—tracking what’s been created, ensuring standards are followed, addressing gaps.
Implement processes: When tax decisions are made, documentation processes should trigger automatically.
Review periodically: Audit your own documentation. Identify gaps. Address missing pieces before auditors do.
As explored in our article on building a scalable corporate tax function during rapid growth, documentation standards are foundational infrastructure that allows tax operations to scale effectively.
Documentation matters most when you’re most vulnerable:
During audits: Clean, organized documentation is your defense.
During due diligence: Buyers scrutinize tax positions. Documentation builds confidence and reduces deal friction.
When leadership changes: If decision-makers leave, documentation preserves the original reasoning.
When tax law changes: If positions become questionable, documentation of original reasoning establishes reasonable cause.
The best time to build strong documentation is before you need it. The second-best time is now.
*Koru Accountancy Corp provides fractional VP/Director of Tax leadership to growing and complex organizations. We specialize in embedding executive-level tax expertise directly into finance teams, supporting companies through growth, transition, and complexity.
To learn more, visit koruaccountancy.com.*
Contemporaneous documentation is anything created at the time a transaction or decision happens—not months later. This includes emails documenting a decision, memos explaining tax positions, formal agreements when arrangements are established, and notes on why a particular tax treatment was chosen. The key is timing: create it when you do it, not when auditors ask for it.
Generally, maintain documentation for at least 7 years (the IRS standard look-back period for audits). However, for significant positions, like intercompany arrangements, entity structures, or major deductions, consider maintaining documentation indefinitely. When in doubt, keep it. Storage is cheap; defending positions without documentation is expensive.ion, memos explaining tax positions, formal agreements when arrangements are established, and notes on why a particular tax treatment was chosen. The key is timing: create it when you do it, not when auditors ask for it.
Partially. You can organize existing materials and create documentation for current transactions going forward. However, you cannot retroactively create contemporaneous documentation for past years. If you’re facing an audit or preparing for due diligence, acknowledge gaps honestly and focus on what can be recovered and organized. Going forward, establish strong processes.
Simple systems work fine to start. A well-organized shared drive with clear folder structure can adequately store documentation. As you scale, more sophisticated systems may help. The key is consistency – everyone uses the same system, materials are organized logically, and critical documentation is easy to retrieve. Searchability matters; when auditors ask for support, you need to find it quickly.
