What Happens If You Get Audited & Don't Have Receipts
The Internal Revenue Service audits a small percentage of tax returns every year, but what happens if you get audited and don't have receipts? While receipts aren’t required when filing taxes, documentation is essential during a tax audit. Missing receipts complicate the process. However, there are still ways to reduce the audit's impact.
Will the IRS Deny Deductions Without Receipts?
No, missing receipts don’t automatically mean your deductions will be rejected. However, they do make it more difficult for the IRS auditors to verify the business expenses that you claimed on your company's income tax return. If you can’t substantiate the tax deductions you claimed, the IRS may increase your taxable income, leading to a higher tax bill.
Using the Cohan Rule
The Cohan Rule allows taxpayers to estimate certain expenses without receipts—but it doesn't give free rein for unsupported deductions. The IRS requires valid documentation to support claims or your deductions could be disallowed.
The IRS will only accept reasonable and credible estimates even with alternative documentation. Additionally, the IRS may reduce your claimed deduction to the average cost for the expense. To increase your chances of success, it’s essential to consult a tax professional offering tax audit services who can apply the Cohan Rule effectively during a business tax audit.
Recreating Your Financial Records
Reconstructing records requires gathering any available evidence to support your claims.
You can reconstruct records with:
Bank Statements and Credit Card Statements: Credit card and bank account statements provide clear records of payments made. They show transaction dates, amounts, and vendors and help validate your claimed business purchases and expenses.
Duplicate Invoices or Receipts: Many businesses keep digital records. Contact your vendors, service providers, or suppliers to request copies of their records.
Canceled Checks and Payment Records: Canceled checks and payment confirmations from automated payment systems can serve as proof for recurring business expenses like rent, utilities, and subscriptions.
Business Calendars and Correspondence: Business appointments, travel dates, and meetings noted in calendars or emails can validate your claimed business expenses. Social media history and activity can also serve as informal evidence of business event attendance.
Cell Phone Records and Location Data: Phone bills can help establish business calls, while GPS data from your phone or apps can confirm business travel locations.
Duplicate Charitable Contribution Receipts: Contact charities to request duplicates of donation receipts. This is especially important if you claimed large contributions, as unusually high deductions for charitable contributions is one of the top IRS audit triggers.
Are There Exceptions to the Cohan Rule?
Yes, there are two exceptions:
Section 274(d) items—business travel, meals, and entertainment expenses—require detailed records (including dates, amounts, and business purposes) to be made at the time of the expense. The IRS will likely disallow the deductions without this documentation.
Section 170 expenses include charitable contributions which require written acknowledgment from the charity. If you can't obtain a duplicate receipt, the IRS will usually deny this deduction.
The Risks of an Audit Without Receipts
Without receipts, the IRS may disallow your business expenses, increasing your taxable income and overall tax liability. As more deductions are rejected, your tax bill will rise. Missing receipts often indicate disorganized records, raising red flags with the IRS and triggering further investigations.
Pro Tip: The best way to avoid these issues is to proactively store and organize your financial documents—such as receipts and invoices—regularly. Digital storage tools make this process easier and more efficient. Well-organized records will save you time, reduce stress, and help you avoid complications during an audit.
Possible IRS Penalties
If the IRS finds discrepancies during an audit, you could face penalties and interest charges for inaccurate tax returns. These may include:
Accuracy-Related Penalties: The IRS may impose a penalty of 20% of the underpaid taxes if your deductions are deemed unreasonable or unsupported.
Failure-to-Pay Penalties: You may incur additional penalties for not paying on time if you owe additional taxes after the audit.
Interest: You’ll also be charged interest on any unpaid taxes and penalties.
In extreme cases, where the IRS suspects fraud or intentional misrepresentation, penalties can escalate to criminal charges and potential jail time.
Never Submit Fake Receipts During an Audit!
Submitting fake receipts is illegal and can result in serious consequences, including charges of tax evasion and fraud, substantial fines, and possible jail time. Falsifying documents may seem tempting, but it's never worth the risk.
Pro Tip: Instead of submitting false documentation, always consult a tax professional. They can help you navigate the audit process and find legitimate ways to reconstruct your records, reducing the likelihood of penalties and ensuring you comply with IRS regulations.
Schedule a discovery call to talk about your IRS audit with an expert.
What to Expect During an IRS Audit
During an audit, the IRS doesn’t prosecute you for wrongdoing—they’re reviewing your tax returns and financial records to ensure that everything is in order. While an audit can be nerve-wracking, it’s essentially a way for the IRS to verify that you’ve paid the right amount of taxes.
However, the business tax audit process becomes more challenging without receipts. The auditors will examine your financial records in great detail and scrutinize any claims that lack sufficient documentation.
There are three types of audits you could face:
Correspondence Audits: Correspondence audits are typically handled by mail. The IRS will ask for additional documentation to clarify certain deductions or claims. If you’re missing receipts, this is an opportunity to submit alternative records, like bank statements or invoices.
Office Audits: Office audits require you to go to an IRS office. It’s more detailed than a correspondence audit, but it’s still relatively straightforward. However, missing receipts will likely lead to a more thorough investigation, requiring you to provide detailed records and estimates to substantiate your deductions.
Field Audits: A field audit is the most invasive type of audit, in which an IRS agent will visit your business or home to examine your records. If you’re missing receipts, the auditor may spend more time reviewing other records, including bank statements, invoices, and even employee records, to verify your claims.
Why You Need a Tax Professional for an IRS Audit
Tax professionals, including Enrolled Agents (EAs) and CPAs, have extensive experience working with the IRS and can guide you through the tax audit process. Enrolled agents (EAs) are federally authorized professionals who specialize in IRS audits. They offer much more than just helping to recreate missing records—they provide a range of audit support services:
Tax Representation: An EA can represent you before the IRS, ensuring that the audit process goes smoothly. They’ll communicate with the IRS directly, saving you time and stress.
Negotiation Skills: EAs will advocate for you if the IRS determines you owe additional taxes. They ensure that any negotiations are fair and tailored to your financial situation. For example, EAs can negotiate the following:
Installment Agreement: This allows you to pay the full amount owed over time, in manageable monthly payments. The total debt remains unchanged.
Offer in Compromise: This option is for situations where you can’t pay the full debt. If you meet specific criteria, the IRS may agree to settle your tax debt for less than the total amount owed.
Reducing Penalties: EAs can help reduce penalties and interest charges by negotiating with the IRS. They can demonstrate reasonable cause for the missing receipts and potentially minimize the financial impact of the audit.
Long-Term Strategy: Beyond the immediate audit, an EA can help set up a system for future compliance. They can advise you on the best practices for record-keeping, tax planning, and other important financial decisions to avoid issues down the road.
How to Dispute IRS Audit Findings
You have the option to request an audit reconsideration if you disagree with the IRS audit ruling. This process allows you to present additional documentation or evidence that may not have been considered during the initial audit.
If reconsideration doesn't resolve the issue, you can take the matter to the U.S. Tax Court and present your case to a judge. It's advisable to work with a tax professional or tax attorney during this process to ensure that your case is presented in the most favorable light.
Navigate an IRS Audit with Professional Help
Handling an IRS audit without receipts can be challenging, but it’s possible to defend your deductions effectively. Using the Cohan Rule, gathering alternative documentation, and consulting an experienced EA can help you present a solid case and minimize potential penalties. With the right strategy, you can work toward a favorable outcome, even without perfect records.
Proactively organizing and maintaining financial records is the best way to safeguard against future audit complications. Digital storage tools and consistent record-keeping habits will save time and stress if the IRS sends an audit notice. By staying prepared, you’ll reduce the risk of future issues and ensure your business remains in good standing.
