How does one go about with missing receipts in light of an IRS audit? Find the answers to some of your concerns and questions here.
In this article:
- Missing Receipts? No Need to Panic
- What Should I Do If I’m Missing Receipts and Facing IRS Questioning or an Audit?
- Understanding the Cohan Rule: How It Can Help If You’re Missing Receipts
- What If the IRS Rejects My Documentation?
- When Should I Seek Professional Advice?
Missing Receipts and IRS Audits: What Should I Do?
Receipt definition: It is a piece of paper which serves as proof that something has been paid for or has been received.
Missing Receipts? No Need to Panic
While it’s a smart strategy to keep all of your receipts in order to make tax time easier, every taxpayer loses at least some of their important receipts. After all, it’s hard to keep a year’s worth of receipts organized–and even harder to maintain the multiple years of receipts needed in case you face an IRS audit.
So what happens if you’re one of the six million taxpayers who have their tax return questioned by the IRS each year, and you’re missing an important receipt or two (or more)?
The important thing is not to panic; there are steps you can take to address the issue and avoid running into problems with the IRS.
What Should I Do If I’m Missing Receipts and Facing IRS Questioning or an Audit?
The IRS expects documentation to back up the expenses that you claim on your federal tax return. Of course, the ideal record in the eyes of the IRS is a receipt for every purchase that you make.
However, if you have lost your receipt–or never received one in the first place–you may still be able to create an adequate record of the expense through alternate means.
Canceled checks, debit and credit card statements, your own written records, e-mail correspondence, notations on a calendar, or even photographs are all potential ways to prove to the IRS that the expense you claimed on your taxes is a valid one.
It does take more work to reconstruct your records looking backward than it does keeping receipts at the time of the expense. However, putting in this effort can help you avoid tax penalties and further IRS action.
Understanding the Cohan Rule: How It Can Help If You’re Missing Receipts
Taxpayers who are facing an audit due to a lack of receipts can thank George M. Cohan for offering them an alternate solution.
Cohan, a Broadway playwright and actor, was audited by the IRS in the 1930s. He was known for spending a lot of money on travel and entertainment. Because he preferred to pay with cash and kept few records of his lavish spending, he lacked the proper receipts that the IRS required at that time.
Instead of simply paying the taxes he owed after the IRS denied each one of his deductions, Cohan decided to take the IRS to court. After losing in the trial court, the Second Circuit Court of Appeals sided with Cohan and created what is known today as the “Cohan rule.”
In short, taxpayers are allowed to prove their deductible expenses by using “other credible evidence” besides receipts. In Cohan’s case, he testified himself that he had paid for his list of deductible expenses in cash, and friends and business associates testified on his behalf that they recalled the expensive dinners and other entertainment.
What If the IRS Rejects My Documentation?
Sometimes the IRS will accept your alternate documentation in place of an IRS receipt without any further issues. If this is the case, wonderful!
However, the IRS may decide that the records of your expenses that you’re offering in place of receipts aren’t adequate. This can mean you will have to pay the taxes you would have owed had you not claimed the disputed expenses, as well as up to a 20 percent IRS negligence penalty for failing to maintain proper records.
You have the option, though, of appealing the decision of the IRS in such cases. Your best chances at avoiding negligence penalties are to demonstrate clearly and factually that you made best efforts to meet the IRS’ recordkeeping requirements.
Moreover, you should know that your own oral testimony may be sufficient to prove that you were entitled to the tax deductions that you took. You can also sign a written statement supporting the expenses you claimed on your tax return; known as an affidavit, this statement can only be provided under risk of penalty of perjury.
If you know that the expenses you listed on your tax return are accurate, even if you don’t have receipts for them, this route may allow you to defend against an IRS audit.
When Should I Seek Professional Advice?
You can certainly try to dispute an IRS audit for lack of receipts on your own, and you can even launch an appeal of their rejection of your alternate documentation by yourself.
Enlisting the help of a qualified tax professional or attorney can help significantly, particularly if the amount at dispute is large or you are having difficulty recreating the records that the IRS needs. These tax professionals have the experience and background dealing with the IRS necessary to help you figure out your options and understand the likelihood that the IRS will accept the records you have to offer.
Moving forward, use your experience as a lesson and take the time to create a file for your important receipts so that you don’t have to go through this stressful exercise a second time.
Have you ever been in a jam where you were facing an audit and did not have all your important receipts in order? What were the steps you took to resolve this? Share your experiences with us in the comments section below.