Posted by BRIAN PRZYSTUP & ASSOCIATES LLC

What Happens If You Get Audited And You Have No Receipts?

What Happens If You Get Audited And You Have No Receipts?

Are you among the 6 million taxpayers whose tax return got questioned by the IRS? This happens every year and these taxpayers are either audited or were sent a verification notice from the agency.

You may find it difficult or impossible to find proof for every item the IRS is questioning if you are asked to prove items reported on your tax return. Hiring a professional to fix the details and talking directly with the IRS may be the best choice for you to make.

If you don’t have all the information necessary to prove items on your return, what happens then?

Here’s an example: 

A taxpayer deducted medical expenses and the receipts are no longer in his hands, as well as the list of medical providers, prescriptions, and other medical costs. This is a really difficult situation to be in so it’s best to retrace your steps. Find out how much your medical expenses are for the year and visit your doctors and the pharmacies to get receipts. If you still have access to your bank statements and canceled checks, then that’s a good starting point for you.

Now, what happens if you’re a business that deducted expenses and you no longer have receipts? It’s understandable that you would have expenses that the IRS should allow even though you can’t provide a receipt. The IRS gives some flexibility and may trust your word that you have allowable expenses. Based on a tax court case, this is known as the Cohan rule wherein you are given flexibility with your records when dealing with the IRS to prove your expenses.

Items That May Not Be Recreated

Seme expenses are required by the tax code to be documented at the same time the expenses occur including:

  • Expenses on Travel and Entertainment: Receipts that records the time the expense is incurred are required. 
  • Contributions to Charity: Receipts for all charitable contributions must accurately reflect the value of the contribution.
  • Records on Mileage: Details such as the mileage, date, place, and business purpose will be asked from you.
  • Gambling Losses: Are you planning to deduct your gambling losses? You may do so but you must have receipts, tickets, statements and documentation such as a diary or similar record of your losses and winnings.

The IRS, technically, disallow your deduction if you do not have the above-mentioned records. However, if it seems reasonable, the IRS auditors may allow some reconstruction of these expenses. 

How to Reconstruct Records?

It’s important to reconstruct the items as soon as possible. If you want to meet your IRS response deadline, make sure you start right away as it can take a while to put all or part of the pieces together.

You have two options: reconstruct your records or just simply provide an acceptable or valid explanation of a deduction to support the expenses instead of the original receipts. You have the right to appeal the decision if the IRS disagrees. During the audit, you can provide facts on how you made your best effort to comply if you argue against penalties. Do your best to avoid the 20% IRS negligence penalty because this is often the result of lack of records.

Tips When Reconstructing Your Records

  • Gather your bank statements and credit card statements and review them. What you paid usually appears in them and they may also be a great substitute if you don’t have a receipt in your hands.
  • You may reach out to vendors and suppliers and ask for a copy as they usually have duplicated records. 
  • You can get back-up information about travel, a number of clients and frequency of service from appointment books.
  • Dates of service or assist in reconstructing expenses can be established through the help of cell phone records. 
  • Avoid estimating miles per week x 52 - miles to deduct. Try to reconstruct a reasonable mileage argument with online map tools instead. Periods of no travel must be considered.
  • You may create a declaration and sign it under penalty of perjury if you reconstruct or estimate expenses in a way that is not required by the IRS.

You may consider asking the help of a tax pro. We understand how filing taxes can be difficult and stressful. If you want to stay away from tax problems, tax professional may help you get access to all the records asked from you by the IRS.

BRIAN PRZYSTUP & ASSOCIATES LLC
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