What Happens if You Are Audited and Don’t Have Receipts?

An Internal Revenue Service (IRS) audit examines a taxpayer’s financial information and tax returns to verify accuracy and compliance with tax laws. Receipts and detailed records are the primary evidence used to substantiate reported income, deductions, and credits. Missing supporting documentation can create significant challenges, potentially leading to adverse outcomes.

Consequences of Unsubstantiated Deductions

When the IRS audits, missing documentation for claimed deductions or credits typically results in their disallowance. This increases the taxpayer’s taxable income for the audited year, as previously claimed reductions are deemed invalid. Consequently, this leads to a higher tax liability, requiring additional tax payments.

Beyond increased tax liability, the IRS assesses interest on underpayments from the original due date until payment. This interest accrues daily at a statutory rate, adjusted quarterly. Taxpayers may also face various penalties for unsubstantiated claims.

An accuracy-related penalty, often 20% of the underpayment, may apply for negligence (failing to comply with tax law or exercise ordinary care) or a substantial understatement of income tax (understated tax exceeds 10% of the tax required or a specific dollar amount). Inadequate records can also lead to other penalties, including for underpayment of estimated tax or fraud, though fraud penalties are for intentional wrongdoing.

Disallowances and penalties can lead to increased IRS scrutiny in subsequent tax periods. A history of unsubstantiated claims or significant adjustments can flag a taxpayer for future audits. This heightened attention can extend for several years, requiring continued diligence in record keeping and tax compliance.

Acceptable Alternative Documentation

When traditional receipts are unavailable, taxpayers can use alternative documentation to substantiate expenses during an audit. The Cohan Rule allows taxpayers to estimate certain expenses if they provide credible evidence that the expenses were incurred and amounts are reasonable. While helpful, the Cohan Rule is not a substitute for proper record-keeping and generally does not apply to expenses requiring strict substantiation, such as travel, entertainment, or certain listed property, under Internal Revenue Code Section 274.

Other documentation can corroborate expenses without a physical receipt:
Bank and credit card statements, showing transaction dates, amounts, and often the payee.
Cancelled checks.
Invoices.
Billing statements from vendors or service providers.
These documents often detail the transaction, linking payment to a specific good or service.

For establishing business purpose or travel dates, collateral evidence can be helpful, such as:
Emails.
Calendars and appointment books.
Travel itineraries.
For example, a calendar entry noting a business meeting supports a travel expense claim. Detailed logs or diaries, such as mileage logs or home office logs, are useful if created contemporaneously with expenses. These logs include dates, mileage, destinations, and the business purpose of each trip or use.

Reconstructing records involves piecing together fragmented information to build a coherent picture of the expense. This process requires a narrative explaining how documents relate to the claimed deduction, demonstrating the expense was ordinary, necessary, and directly related to the taxpayer’s trade, business, or income-producing activity. Clear and logical presentation of this reconstructed evidence increases the likelihood of IRS acceptance.

Responding to an Audit Notice

Upon receiving an audit notification from the IRS, carefully review the correspondence. The notice, often a CP2000, 566, or similar series, specifies the tax year, items under examination, and audit type. Audits range from correspondence (by mail) to office (in-person at an IRS office) or field (agent visits home or business). Understanding these details helps prepare your response.

Respond promptly to the IRS notice, typically within the 30-day timeframe. Ignoring it can lead to the IRS disallowing all questioned deductions or credits, resulting in a proposed tax deficiency. Organize all gathered documentation, including alternative evidence, clearly and logically. This organized presentation helps the auditor efficiently review information and understand your position.

Communicate professionally with the IRS, focusing solely on items questioned in the audit notice. Provide only requested information, avoiding extraneous details that could broaden the audit scope. Maintain copies of all submitted documents and correspondence for personal records. Send documents via certified mail with a return receipt for proof of delivery.

Seeking professional assistance from a qualified tax professional (CPA, Enrolled Agent, or tax attorney) can be beneficial when facing an audit, especially without complete receipts. These professionals can interpret the audit notice, advise on presenting documentation, and communicate with the IRS on your behalf. If the audit results in a proposed change you disagree with, you have a right to appeal the decision within the IRS administrative system, typically by responding to a 30-day letter.

Importance of Ongoing Record Keeping

Effective record keeping forms the foundation of sound financial management and tax compliance. Maintaining accurate, organized records is the most effective preventative measure against potential audit issues from missing documentation. It directly supports the taxpayer’s ability to substantiate all income, deductions, and credits claimed, significantly reducing disallowances and associated penalties.

Taxpayers should keep a variety of records, including:
Original receipts for expenses.
Invoices for goods or services.
Bank and credit card statements.
Digital confirmations, such as email receipts or online order histories.
For activities like business travel or home office use, detailed logs are necessary to document the business purpose, mileage, or time spent.

Practical strategies for maintaining records include physical and digital methods. Physical receipts can be organized in a filing system, categorized by expense type or month. For digital records, scan physical receipts and store them securely in cloud-based solutions or on external hard drives for accessibility and protection against loss. Accounting software or tax preparation programs can also streamline the process, allowing direct attachment of digital documents to transactions.

Most tax records should be kept for at least three years from the date you filed your original return or two years from the date you paid the tax, whichever is later. This period aligns with the general statute of limitations for the IRS to assess additional tax. Some records, such as those related to property basis or income omissions, may require longer retention, sometimes indefinitely. Adhering to these guidelines aids in audit defense, simplifies future tax preparation, and provides a clear financial history for planning.