The prospect of facing the IRS audit can seem intimidating, especially if you don’t have the documents you need to justify the claims you made on the tax return.
Understandably you might be wondering what happens if you get audited and don’t have receipts if you are in this situation.
The good news is that you just have to prove that the deductions you claimed on your tax return were credible business expenses. You don’t necessarily have to provide receipts for goods and services you’d like to get refunded for.
The IRS might initiate an audit if their agents determine that some of the claims you made don’t seem credible. So, here’s what you can do to make this process as smooth and painless as possible, even if you don’t have all the receipts.
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The Cohan Rule
Messy financial records aren’t exactly a novelty. But unfortunately, small businesses often neglect to keep a clean record of their expenditure, which can be a cause for an audit.
This issue has a long history, and under the current United States Tax Law, taxpayers have the right to explain their expenses when they can’t present records.
The Cohan rule was established after the 1930s Commissioner vs. Cohan case. Mr. Cohan was an entertainer who couldn’t provide receipts for his business expenses. The court ruling created a precedent by allowing the petitioner to approximate his expense.
This rule is still in effect, which means that taxpayers who are facing an audit and don’t have all receipts are allowed to explain their reasons for claiming a tax deduction.
However, the IRS imposes certain limitations on the Cohan rule. For example, IRS Code 274 restricts or eliminates tax deductions for entertainment, travel, and meal expenditure.
Self-employed professionals and small businesses must be aware of these limitations when filing taxes to avoid getting audited.
The Audit Selection Process
The IRS usually audits tax returns that contain incorrect or inconclusive information. However, a certain percentage of tax returns is randomly selected for auditing.
Even though the IRS can initiate several different types of audits depending on the severity of the case, most audits are conducted via mail. This means that the taxpayer has to provide additional documents to justify tax credits or deductions they claimed.
The important thing to remember is that the IRS can audit tax returns for the last three tax years, so it’s paramount to keep receipts of all business expenses during this period.
The IRS might review tax returns for the last six tax years if its agents detect a taxpayer has underreported income for a few years. Nonetheless, the IRS commonly initiates an audit for the following reasons:
- Random computer screening – The IRS uses a system that utilizes an algorithm to compare all tax returns against standards devised within the National Research Program. Tax returns that don’t meet these standards for one reason or another have a higher chance of getting audited.
- Auditing of business partners – You might receive an audit letter if you collaborated with a business currently being audited.
Receipt Types the IRS Requests
Most audits are resolved within six months, but in some cases, this process can last much longer. Being prepared and having all the documentation the IRS might request from you ready is the best way to go through an audit smoothly.
You’ll be asked to present receipts for all purchases or goods that don’t seem directly related to your daily business operations. Broadly speaking, the IRS will usually want to see one of the receipt types below.
Travel expenses
Airplane tickets and hotel invoices are some of the most common receipts businesses have to present to the IRS as proof that their business trip took place.
Simply put, if you’re running a local flower shop, you’ll have to provide evidence your trip to another city or state was business related. Again, keeping track of your vehicle’s mileage can help you prove that the travel expenses you claimed on a tax return were justified.
Online Purchases
You’ll need a receipt for all items you buy online because the IRS might need additional explanation if you purchase goods or services that don’t seem essential for running a business.
Donations
Request a receipt whenever you make a charitable donation because it’s the easiest way to prove the donation’s overall value. Also, if you claim gambling losses on your tax return, you’ll need to attach receipts, statements, and tickets to avoid an audit.
Please note that the IRS doesn’t refund entertainment tax deductions. Hence the best practice is to refrain from claiming entertainment deductions on a tax return.
Supplying Proof of Your Business Expenses without Receipts
As we already established, the Cohan rule gives taxpayers the right to provide other evidence or explanation of their business expenditure besides receipts. Fortunately, acquiring this information is usually straightforward. Here are a few methods you can use if you no longer have the receipts.
Acquire Bank Records
A bank or credit card statement can serve as proof of purchase, which is why it is a perfect replacement for a missing receipt. Your company’s account statement will likely contain the date and the sum of the purchase the IRS is disputing.
Request Copies of Receipts from Your Suppliers
One of the fastest ways to find copies of receipts you’re missing is to get in touch with your suppliers. Most companies keep digital records of all products they sell, so obtaining a copy of an invoice or a receipt shouldn’t be too difficult.
You should try to reach out to a charitable organization to get a copy of a receipt for a donation you made if you misplaced the original receipt.
Use Your Company’s Business Calendar
Although it cannot help you prove that the item or service you purchased was a justifiable business expense, your company’s business calendar can demonstrate that you were scheduled to be at the location where the purchase took place.
So if you’re trying to justify a plane ticket you purchased to get to a business meeting, your company’s calendar can be the evidence that the meeting was scheduled for the day of the flight or the next day.
Obtain Your Smartphone’s Location Data
We leave a digital trail wherever we go. Social media posts, emails, call logs, or even a Smartphone’s location data can help you prove the travel expense deduction you claimed is legitimate. Don’t forget that acquiring a Smartphone’s location data can be difficult.
Outcomes of Going Through an Audit Without Receipts
Contrary to the popular opinion created by mass media, the IRS audits rarely result in jail time. The most likely scenario for failing the IRS audit is a hefty fine, provided that the evidence you submitted during an audit was insufficient.
You may still lose a substantial amount of money even if the IRS opts to disallow some of the tax deduction claims you made on your tax return because your taxable income amount will increase.
Hiring a CPA or a tax attorney can lower your tax refund indirectly through fees since choosing to represent yourself in front of the IRS during an audit is usually not advisable.
The best possible outcome of going through an audit without receipts is that the IRS finds the evidence you provide corroborates your tax deduction claims. In this case, the taxable income amount will remain unchanged and you’ll receive a tax refund within a month or two.
How to Avoid Facing an Audit in the Future?
The auditing process can be stressful because it’s often difficult to know its outcome. Moreover, there are no rules or regulations preventing the IRS from auditing the same account two or more years in a row.
The best way to avoid tax refund delays due to an audit is to keep your personal and professional financial records for three years after you file a tax return.
Eliminating the chances of getting audited is impossible because there’s always a small chance the IRS system will randomly flag your tax return for an audit because it doesn’t meet its norms.
Accounting software like QuickBooks or NetSuite can help you keep a neat record of the receipts for the goods and services you buy for your business.
Frequently Asked Questions
Taxpayers must respond to an audit letter within a month. Consequently, you’ll have thirty days to gather all receipts you misplaced.
Ignoring the IRS audit letter isn’t advisable. The IRS will disallow all tax deduction claims on your tax return and send you a tax bill that also includes interest rates and penalties.
You’ll only have to show the copies of the receipts that confirm your business expense calculations are accurate. In addition, the IRS might want to see bills, loan agreements, travel tickets, canceled checks, and other financial documents.
Small businesses and self-employed professionals are not required to provide receipts for business expense claims under $300.
Final Thoughts
The US Tax Law gives taxpayers the option to produce different types of evidence that explain why a claimed business expense was necessary.
As a result, you don’t necessarily need all receipts if you can prove that the business expense deduction claims you made on a tax return were justifiable in some other way.
The Cohan rule has limitations, and in some situations, you’ll have no other choice but to supply copies of the receipts for services or goods you purchased for your business.
Obtaining receipt copies has become easy in the digital age, and more often than not, you won’t need a lot of time to retrieve receipts you lost.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
