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Permissible Ways When Audited but No Proof Presented

Permissible Ways When Audited but No Proof Presented

Taxes is one of the legally imposed obligations on every citizen. In the US, Internal Revenue Services is tasked to for the assessment and collection of these enforced monetary obligations. One of the scariest things to happen is when you are subject to audit by the IRS even if you keep the detailed financial records, but if receipts are incomplete or not kept at all is traumatizing. IRS audit will only be conducted if they believed that you erroneously reported your income and expenses or deductions. It could be that IRS is suspecting you to be earning a higher income or you have not reported your other source of income.


IRS will notify you by sending an email questioning your income tax return and they require you to present evidence and documentation to prove it. You need not panic if you do not have all the receipts to prove your income does not mean you will automatically be punished. Most people don’t keep perfect records of their finances, so there are plenty of ways to resolve an audit even if you don’t meet IRS receipt requirements.


Steve Stockman Bill


During the President Obama administration, Rep. Steve Stockman of Texas introduced a bill he called the “The Dog Ate My Tax Receipts Act,” to allow taxpayers to make excuses in getting away with penalties. Surprising the bill passed, taxpayers who do not provide documents requested by the IRS to claim one of the following reasons:


  • The dog ate my tax receipts.
  • Convenient, unexplained, miscellaneous computer malfunction.
  • Traded documents for five terrorists.
  • Burned for warmth while lost in the Yukon.
  • Left on table in Hillary’s Book Room.
  • Received water damage in the trunk of Ted Kennedy’s car.
  • Forgot in gun case sold to Mexican drug lords.
  • Forced to recycle by municipal Green Czar.
  • Was short on toilet paper while camping.


At this point, what difference does it make?


Obviously, these are lame excuses for the missing documents, and IRS is currently proffering.


The Cohan Rule?


The widely known tax case of Cohan vs Commissioner, the saving grace for many taxpayers who have been audited. George M. Cohan a Broadway star who was heavily audited in the 1990s for business expenses he didn’t have proof of. IRS disallowed the large travel and entertainment expenses of Cohan for non-presentation of receipts. When IRS denied his deductions, so Mr. Cohan took the IRS to court. The Court of Appeals ruled in favor of Mr. Cohan and against the IRS, it still allows taxpayers to prove by “other credible evidence” that they actually incurred deductible expenses. He testified that he paid in cash, and others also supported Cohan and remembered big and expensive dinners and the court came to the decision that the IRS had to accept the estimates of his expenses.


This ruling does not always work with IRS, but it can certainly still be invoked. IRS or a court may be convinced by oral or written statements or other supporting evidence such as calendar notes, photographs, canceled checks, etc. If you get over that hurdle and can make a reasonable approximation of the expenses, your tax position may be sustained despite your lack of documentation.


When receipts were really lost or damaged or you just don’t have them, there are other types of documents you could use as evidence that the IRS auditor is willing to accept:


  • Calendar logs of meetings/travel/daily tasks
  • Canceled checks
  • Credit/debit card statements
  • Mileage records
  • Photographs of events/individual items
  • Emails
     

The IRS prefers to have a physical paper or the picture of an online receipt. A credit card statement will also be acceptable, which is a great paper trail to verify the tax deduction expenses. They will also accept a bill or a canceled check to verify your expense. You can produce canceled checks but the IRS will usually require corroborating proof to go along with the checks. This can include some type of business or personal accounting journal entry. Taking a ‘selfie’ to prove that you were physically in that place and time is not acceptable.
 
After all permissible actions and documents you are still unable to produce receipts to prove that you really did spend money on one of your deductions, it could result in a tax penalty. The penalty amount will be based on when you originally filed during your tax deadline. Possibly, a penalty which is based on the amount that you still owe, plus interest. This penalty amount will have to be paid at the end of the audit, as well paying the extra amount of taxes that you owe. Lastly, IRS is not that cruel or heartless, you can talk with the IRS auditor as to the time to repay all that you owe.

John Pournaras Agency
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