You just received a Notice of Audit from the IRS, only to realize that you don’t have your receipts anymore. What do you do?
In this post, we cover how to handle a tax audit if you don’t have the proper documentation on hand.
How Do I Know if I am Being Audited by the IRS?
The IRS sends notifications via USPS, not by phone or email. Be wary if you receive a call or email from someone claiming that you are being IRS audited—this is a scam! The IRS will mail a notice to the most recent address they have on file for you.
As we stated in a recent post, there are several types of IRS notices. Most audits are correspondence or mail-in audits, which usually involve small sums of money. Respond to the audit notice promptly to prevent your case from escalating.
What Happens if I’m Being IRS Audited and Don’t Have Receipts?
The IRS offers other ways to verify your taxes. Whether you don’t have receipts because you threw them away or lost them, you still have a path forward through your tax audit.
If the IRS seeks proof of your business expenses and you don’t have receipts, you can create a report on your expenses.
As a result of the Cohan Rule, business owners can claim expenses without receipts, provided the expenses are reasonable for that business.
How to Recreate Your Business Expenses Without Receipts
- Ask vendors for receipts. It’s rare for a business to not have automated payment systems these days, so vendors can easily provide documentation for your transactions.
- Consult your calendar and credit card statements. For client entertainment-related expenses, review your credit card statements alongside your business calendar. Did you have a credit card charge for a meal on the same day you had a client meeting? Use this to document meal expenses.
- Review bank statements. A look back at your bank and credit card statements from the year in question will help you pull together an accurate record of qualified business expenses. While a receipt is preferable, a line item on an account statement is better than no record at all.
What if the IRS Doesn’t Accept My Deductions?
Once you’ve recreated your business expenses and shared them with your auditor, there is a chance the IRS will not approve all of your proposed deductions. Known as a “disallowed deduction,” the IRS will add the unapproved deduction to your taxable income, which means you will need to pay higher taxes than you expected.
If your disallowed deductions move you into a higher tax bracket, you will also be paying a higher tax rate on your taxable income for the year.
Further, the IRS charges interest and late fees on disallowed deductions. Why? If your auditor nullifies your deduction, this means the income is taxable and that you owed these taxes when your tax return was due. If you do not pay your owed taxes post-audit, you may face a penalty from the IRS.
We hope this eases some of your fears regarding undergoing an IRS audit without receipts. While meticulous record keeping is the best policy, you still have a path forward if you don’t have receipts.
Still have questions? We’re here to help you navigate your IRS audit. Contact us today.
Further reading:
Are Tax Refunds Delayed This Year?
5 Things High Income Earners Need to Know About Biden’s Tax Proposal
Photo by Mike Walter on Unsplash
FAQs
The auditor may ask your CPA to recreate a detailed history of your expenses using bank records and cancelled check. OR, they may remove the expense from your original tax return. This is all going to depend what the missing items are (and the mood of the auditor, to be honest).
What happens if you get audited and don't have proof? ›
The Internal Revenue Service may allow expense reconstruction, enabling taxpayers to verify taxes with other information. But the commission will not prosecute you for losing receipts. The IRS may disallow deductions for items or services without receipts or only allow a minimum, even after invoking the Cohan rule.
What happens if I don't have a receipt for my business? ›
If you choose to claim an expense without a receipt, make sure you have other proof of the transaction, either on a bank statement or as detailed notes. You need to be able to demonstrate that the expense is solely for business use and that the amounts have been recorded and calculated accurately.
What happens if you get audited and can't pay? ›
Penalties and interest both apply when you have unpaid taxes. For instance, if you file your return late, you'll have to pay penalties and interest on the unpaid tax. If you incur audit penalties, interest will accrue on the penalty. The IRS adjusts its interest rate quarterly, and it varies based on the prime rate.
What happens if you don't have receipts for home improvements? ›
If you don't have receipts for your tax-deductible home improvements, you may be in trouble if you get audited. In lieu of receipts, you may be able to provide bank statements or contracts as proof of payment for qualifying home improvements.
Do you need receipts if you get audited? ›
Without specific receipts, the Cohan Rule says you can claim expenses if they are reasonable and credible, and you have attempted to show this to the IRS, using other documents as your audit defense tools.
Should I be worried if I get audited? ›
Audits can be bad and can result in a significant tax bill. But remember – you shouldn't panic. There are different kinds of audits, some minor and some extensive, and they all follow a set of defined rules. If you know what to expect and follow a few best practices, your audit may turn out to be “not so bad.”
What happens if I don't have all my receipts for IRS audit? ›
Whether you lost your receipts, they were damaged, or you simply don't have them, there are several documents you could use as evidence to answer an IRS audit when you have no receipts: Calendar logs of meetings/travel/daily tasks. Canceled checks. Credit/debit card statements.
What can I do if I have no receipt? ›
What to do if you lose an expense proof?
- Return to the merchant to look for the receipt.
- Use the lump sum refund.
- Show a bank statement.
- Provide a sworn statement.
Review bank statements and credit card statements. They are usually a good list of what you paid. They may also be a good substitute if you don't have a receipt. Vendors and suppliers may have duplicate records.
The good news is, there's a limit to how bad an audit can get. Sure, it's rough to fail an IRS audit. And paying the bill they'll probably stick you with is going to hurt. But unless you're refusing to pay taxes or purposefully trying to defraud the government, you won't be facing jail time.
Can you sue your accountant if you get audited? ›
If the accountant claims that there are no errors to fix, or if they refuse to pay back your IRS penalties that they are responsible for making in the first place, then you may be able to sue your accountant for malpractice. In a lawsuit like this, you may be able to claim your penalties as damages.
How much money do you have to owe the IRS before you go to jail? ›
You ignore the bill and all of the IRS's collection notices. At this point, the IRS may obtain a civil judgment against you for the $10,000. This gives the IRS the right to issue a federal tax lien, seize your assets, garnish your wages, or take other collection actions. The IRS cannot put you in jail.
At what amount does IRS require receipts? ›
The IRS receipt requirements for both $75 and under expenses and expenses, in general, are straightforward. Each receipt should include: Date, time, and amount. The name of the business where the employee made a payment and created the expense.
Does IRS require receipts for all expenses? ›
You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Additional evidence is required for travel, entertainment, gifts, and auto expenses.
How much can you claim home office without receipts? ›
The prescribed rate is $5 per square foot with a maximum of 300 square feet. If the office measures 150 square feet, for example, then the deduction would be $750 (150 x $5).
What documents do you need if you get audited? ›
Documents you may be asked to bring can include:
- Home mortgage statements.
- Previous tax returns.
- Receipts.
- Brokerage statements.
- Retirement account records.
- Pay stubs.
FURTHER IRS ACTION
Additional steps IRS can take if you fail to respond include placing a tax lien on your property, garnishing your wages, or seizing assets to satisfy the tax debt. IRS has broad powers to collect taxes owed. Failing to respond to an audit notice can allow them to take more aggressive action.
How far back do they look when you get audited? ›
How far back can the IRS go to audit my return? Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years.
What are the consequences of being audited? ›
The most common penalty imposed on taxpayers following an audit is the 20% accuracy-related penalty. The IRS can also assess civil fraud penalties and recommend criminal prosecution.
