What Happens if You Get Audited & Don’t Have Receipts?
Tax audits involve the IRS investigating your tax account to verify the accuracy of tax returns, asking that you provide proof of the information recorded when you file, which may cause you to feel panicked if you don’t have all of the necessary documents to justify every claim.
However, there have been countless taxpayers before you who have survived an IRS tax audit with less-than-perfect records, so if you find yourself in this situation, here is how you can proceed.
TABLE OF CONTENTS
What Happens if You Get Audited & Don’t Have Receipts For The IRS?
What Is The Cohan Rule?
How To Reconstruct Tax Records
What Is An IRS Audit?
3 Main Types Of Tax Audits
Tax Avoidance Vs. Tax Evasion
What To Do When You Are Audited And Don’t Have Receipts For The IRS
How Tax Professionals Can Help With IRS Audits
Key Takeaways:
- If taxpayers are audited but don’t have all of their receipts for the IRS, they must do their best to reconstruct their tax records by searching through bank account statements, credit card history, and calendars, and reaching out to companies to get copies of receipts or develop reasonable estimates to submit to the IRS.
- The Cohan Rule allows taxpayers to utilize reasonable estimates of expenses for evidence during tax audits if they do not have the original receipts.
- After responding to the IRS audit, the commissioner will either accept the information, partially accept the information, or deny the information, allowing the taxpayer to then accept the response, take the case to tax court, or request an appeal conference.
What Happens if You Get Audited & Don’t Have Receipts For The IRS?
If taxpayers are experiencing a tax audit with the Internal Revenue Service but do not have the appropriate receipts, they will be asked to recreate their expense records.
When claiming expense deductions during the process of filing your federal income tax return, it is not required to provide receipts as proof of the integrity of your purchases. However, in the case that your tax account is selected for an IRS audit, you must have documented evidence of those purchases in order to deduct the transactions from your taxable income.
If taxpayers do not have accurate records for all of the claims reported on their tax returns, it may be beneficial to seek tax audit representation to help them resolve the issue.
What Is The Cohan Rule?
The Cohan Rule allows people to utilize reasonable estimates of expenses when claiming tax deductions if they do not have the original payment records, given that there is a factual basis behind the documentation provided.
The Cohan Rule was established based on the Cohan v. Commissioner case of the 1990s when the Broadway star George M. Cohan was the subject of an IRS tax audit but he did not have many of the receipts required to directly prove his business expenses that were claimed as deductions. Rather than accept the denial of his tax deductions, Cohan took the IRS to court, and the decision was made to accept the business expense estimates without legitimate receipts.
Following the Cohan trial, business owners could utilize the Cohan rule to claim tax deductions without receipts as long as they had some other form of reasonable documentation to prove that the payments were made for business purposes.
Proof Of Income And Expenses Without Receipts
If small business owners or freelancers are hoping to utilize the Cohan rule for a business expense they do not have a receipt for, some of the forms of evidence that may be adequate in proving the legitimacy of the transaction include:
- Copies of canceled checks
- Credit card statements
- Debit card statements
- Bank account statements
- Cell phone records
- Emails
- Calendar logs that detail tasks, meetings, or travel
- Event photographs
- Mileage records
How To Reconstruct Tax Records
If taxpayers receive an IRS notice that they are being audited but are missing receipt information, there are steps they can take to reconstruct their records before giving up and accepting a higher tax bill. From narrowing down the date of purchase to finding evidence of that purchase, it is important to find something to back up the claim if the taxpayer hopes to have the expense approved during a tax audit.
Referencing Any Personal Calendar, Business Calendar, Or Appointment Book
If a taxpayer is missing itemized receipts for tax breaks listed on their income tax returns and is hoping to reconstruct those records, a good place to start is referencing their personal calendar to identify when and where those purchases were made. From there, it could be easier to search through their bank account history to find a transaction record.
Checking Photo Gallery And Social Media For Travel History
For taxpayers who have claimed travel expenses on their tax returns, checking their photos and social media posts is a beneficial strategy to help them find evidence of their travel history and its relevance to their business.
Searching Through Credit Card Statements And Bank Account Statements
While the best proof of purchase for a tax audit would be an itemized receipt that clearly states the nature of the statement in question, in the case that this evidence has not been kept on record, a taxpayer can benefit from searching through their credit card and bank statements to find any documentation of purchase that is related to the deductions claimed on their tax return.
Reaching Out To Shops And Vendors For Copies Of Receipts
Now that it is 2023, it is easier than ever to trace computer documentation of expense history. Most businesses have updated their bookkeeping systems from paper records to point-of-sale systems that are connected to the cloud, allowing them to keep financial records for several years.
If taxpayers remember where they purchased a business expense, it is worth the effort of reaching out to their suppliers, explaining the situation, and asking if they are able to receive a copy of the original receipt from when the purchase was made.
Making A Best Estimation If All Else Fails
If there is a situation where it is impossible to search through records to find expense histories or proof of cost, taxpayers are responsible for doing as much research as possible to estimate their expenses. If it is a specific item they are trying to deduct, taking a photo of the item and writing down everything they remember about the situation where they purchased the item is the first step.
The taxpayer should also do market research into how much that item might have cost when it was purchased and take a screenshot of the store catalog where the item is sold. Being aware of the second-hand price of the item using websites such as Craigslist, Facebook Marketplace, and eBay, will also be a valuable strategy in building up their court case for items claimed without a receipt.
What Is An IRS Audit?
A tax audit is the process of the IRS investigating the accuracy of the taxpayer’s submitted income tax return with the goal of verifying that all of their income is disclosed and that all tax deductions are valid. The goal of an IRS audit is to verify that taxpayers pay their rightful tax liability and are not committing an intentional tax crime by understating their income or overstating their deductions.
3 Main Types Of Tax Audits
1. Correspondence Audits or Mail Audits
A mail audit involves the simplest audit process as all communication is handled through the mail and the taxpayer is not required to meet with an auditor in person. A correspondence audit usually involves receiving an audit notice in the mail and then sending in additional documentation to supplement a filed income tax return.
2. Office Audits
An office audit involves the taxpayer visiting an IRS, bringing with them supporting financial records and documentation so that an IRS officer can take a more in-depth look at the information reported on the taxpayer’s filed tax return. Taxpayers have the right to attend this meeting alone or bring with them a tax professional, such as a certified public accountant (CPA) or tax attorney, as representation during the audit.
3. Field Audits or In-Person Audits
A field audit is often the most thorough type of tax audit, during which the IRS auditor will visit the taxpayer’s home or office to investigate their tax account. During a field audit, most, if not all, of the itemized deductions listed on the taxpayer’s return will be investigated for accuracy.
How Are Tax Accounts Selected For IRS Audits
According to the IRS, taxpayers are selected for a tax audit through a “random selection and computer screening” that helps with the development of “norms” for similar tax returns through the National Research Program of the IRS.
Another instance in which individuals are sent an audit letter is when their federal income tax returns are related to the tax return of other taxpayers who are being audited.
Tax Avoidance Vs. Tax Evasion
Tax Avoidance
Tax avoidance is a legal strategy someone can utilize to lower their tax bill by claiming tax breaks like tax credits and tax deductions. Tax credits lower a person’s tax liability by directly lowering the amount they owe by a specific dollar amount, and can be refundable, non-refundable, or partially refundable.
Tax deductions, on the other hand, lower the taxpayer’s taxable income, and can be claimed in standard deduction amounts or through itemizing individual expenses.
Tax Evasion
Tax evasion is a type of tax fraud that involves a taxpayer intentionally understating their income or overstating their tax deductions. If a person accidentally makes an error in filing their tax return, this will not be considered tax evasion or tax fraud, as the act must be deliberate for it to be considered tax evasion.
What To Do When You Are Audited And Don't Have Receipts For The IRS
There are several steps taxpayers should follow in the instance they are sent an audit letter.
1. Read The Audit Letter Carefully.
The first step to take during the audit process is to carefully read through the audit letter you received in the mail to understand the nature of the audit and learn what the IRS needs from you, and your options in moving forward. Within the audit letter, you can gain an understanding of what action you need to take to proceed, such as submitting supplemental documents or filling out another IRS form. The audit letter will also include details about how to contact your IRS representative, the deadline for submitting documentation, and your appeal rights.
If you are still unsure about the nature of the audit after reading the IRS letter, hiring a tax professional to assist you throughout the audit process can help you prepare documentation or potentially represent you in negotiating with the IRS in the case of an office audit or a field audit.
2. Gather All Tax Records To Prepare Your Response To The IRS.
The second step in handling an IRS audit is to gather all tax records and supporting documentation required to support the claims in your tax return.
This includes tax returns from previous years, receipts, bills, canceled checks, employment records, medical bills, and other legal papers. In the case that you do not have all of this information available, you can follow the above steps to recreate your tax records to the best of your ability.
3. Respond To The IRS Audit.
After all of your supporting documentation has been gathered as well as reconstructed invoices and reasonable estimates, you can attach copies of the forms to your audit reconsideration letter request. Within this submission, you must also provide detailed explanations of the items that are being claimed using reasonable estimates or recreated records so the IRS can evaluate the information in consideration of the Cohan rule.
It is also important to include your best contact information, including your name, phone number, and availability.
4. Await The IRS Response.
There are several potential responses you may receive from the IRS as a result of responding to your audit submission.
Information Accepted
If the IRS sends you a letter informing you the information is accepted, this means that the issues have been fully resolved and the provided evidence has been accepted by the commission.
Information Partially Accepted
If you receive a letter stating the information you have submitted was partially accepted, your assessed tax will partially be reduced, and the commission will offer recommendations about how to proceed.
The Information Does Not Support Your Claim
If the commission rejects the documentation you provided in your audit submission, you will receive an IRS letter saying that the information does not support your claim. In this situation, you can either pay the increased taxes, take the case to court, or request an appeals conference to have your case reviewed by an IRS appeals agent.
What Happens If Fake Audit Receipts Are Submitted?
If a taxpayer attempts to submit fake receipts during a tax audit and the IRS discovers foul play, there are several potential outcomes that usually involve penalties and fines.
If there is a mistake in the audit receipt related to understated income, false deductions, or personal expenses claimed as business expenses, this is considered negligence, and the taxpayer may be subject to fines.
If intentional discrepancies are revealed in the tax documents, this is considered tax fraud, and the case could be sent to the criminal investigation division of the IRS. The taxpayer may also be subject to a 75% fine.
There is no penalty for losing a receipt, so if taxpayers no longer have expense documentation and are unable to reconstruct their records or provide reasonable estimates, it is better to accept their increased tax liability than to commit tax fraud.
How Tax Professionals Can Help With IRS Audits
While it is possible to navigate the audit process alone, with the added complication of not having all of the receipts you need, utilizing the services of an experienced tax professional can help protect your rights, lower the money you owe to the IRS, and give you advice about the tax law to ensure the problem is resolved. Tax experts are especially helpful if the audit findings reveal inaccuracies related to a tax haven or tax shelter, so if you or your business are involved in complicated audit cases, hiring a professional is extremely valuable.
If you need help navigating the investigation from IRS auditors or have questions about how you can prepare yourself for a potential audit in the future, consulting with an IRS audit lawyer at an established tax debt relief company like Ideal Tax can build your confidence in your tax situation so you no longer have to worry about inaccurate returns or unorganized recordkeeping.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
