What Happens If I Get Audited and Don’t Have Receipts?

A tax audit is a formal examination by a tax authority, such as the Internal Revenue Service (IRS) or a state tax agency, of an individual’s or organization’s financial records. Its purpose is to verify that reported income, expenses, deductions, and credits are accurate and comply with tax laws, ensuring the correct amount of tax has been calculated and paid. Robust documentation is a fundamental element of the tax system, as it provides the necessary evidence to support all figures reported. This article explains the implications of missing receipts during a tax audit and outlines steps taxpayers can take in such a situation.

Receiving an Audit Notification

Taxpayers typically receive audit notifications through official mail from the IRS or a state tax agency. These letters are never initiated by phone or email, serving as an indicator of authenticity. The initial letter specifies the tax year under examination and often indicates the general issues being reviewed, and provides instructions for responding.

Upon receiving an audit notification, carefully review the letter to understand the audit’s scope and deadlines. The letter will detail the specific items on the tax return that require documentation or clarification. Note these deadlines and the audit type: correspondence (handled by mail), office (requiring a visit to a tax office), or field (conducted at the taxpayer’s home or business).

Importance of Records and Documentation

Receipts and other financial records are crucial for tax purposes because they substantiate claims made on a tax return. Tax authorities require accurate records to verify reported income, expenses, credits, and deductions.

General types of records that taxpayers should keep include invoices, bank statements, canceled checks, and mileage logs. For businesses, this extends to sales records, purchase records, and payroll documentation.

Impact of Missing Receipts

When receipts and other primary documentation are unavailable during an audit, tax authorities may disallow deductions or credits claimed on a tax return. This disallowance occurs because there is insufficient evidence to support the reported amounts. The lack of substantiation can lead to an increase in the taxpayer’s taxable income.

Disallowed deductions or credits result in an increased tax liability for the taxpayer. This can lead to the obligation to pay additional taxes. Interest charges on the underpayment typically accrue from the original due date of the tax return.

Tax authorities may also impose accuracy-related penalties on the underpayment. These penalties, often 20% of the underpaid tax, can apply for negligence, disregard of rules, or a substantial understatement of income tax. For individuals, a substantial understatement exists if the reported tax liability is understated by 10% or $5,000, whichever is greater.

Presenting Alternative Evidence

While original receipts are the preferred form of evidence, other forms of documentation may be accepted to substantiate claims, especially if the original receipts are lost or destroyed. Bank statements and credit card statements can demonstrate the date, amount, and payee of a transaction. Canceled checks also provide proof of payment.

Contemporaneous logs, such as mileage records or calendars noting business appointments, can help establish the purpose and details of an expense. Third-party records, like invoices from vendors or employer expense reports, can corroborate deductions. In some circumstances, tax authorities may consider reasonable estimates for certain expenses if some credible evidence exists, a concept referred to as the “Cohan Rule.”

The “Cohan Rule” originated from a 1930 court case where a taxpayer successfully argued for the estimation of expenses despite lacking complete receipts. This rule suggests that if a taxpayer can demonstrate that an expense was incurred and provide a reasonable basis for the estimate, the tax authority may allow the deduction. However, the estimated amount must be credible and supported by circumstantial evidence.

Communicating with the Auditor

Maintaining a cooperative and transparent approach is important when communicating with a tax auditor, even with incomplete documentation. Providing all available records, including alternative evidence, demonstrates a willingness to comply. Clearly explaining what documentation is missing and the circumstances surrounding its absence can also be beneficial.

Professional and respectful communication helps facilitate a smoother audit process. Responding to all information requests within specified deadlines. Taxpayers should also understand their rights during an audit, which include the right to representation and the right to appeal audit findings.

Seeking professional assistance from a qualified tax professional, such as a Certified Public Accountant (CPA) or an Enrolled Agent (EA), can be beneficial. These professionals can help navigate the audit process, effectively present available evidence, and communicate with the tax authority on the taxpayer’s behalf. They can also help ensure that taxpayer rights are protected throughout the examination.