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

When the Internal Revenue Service (IRS) initiates an audit, it reviews an individual’s or organization’s financial records to confirm the accuracy of reported tax information. An audit does not inherently suggest wrongdoing, as selections can occur through various methods, including random computer screening. However, comprehensive and accurate documentation is essential for navigating any tax audit successfully. The absence of proper records, particularly receipts, can transform a routine inquiry into a complex and potentially costly ordeal, underscoring the importance of understanding IRS record-keeping expectations.

IRS Documentation Expectations

The IRS requires taxpayers to maintain adequate records to support income, expenses, and credits claimed on a tax return. These records serve as evidence to substantiate the amount, purpose, and date of financial transactions. Acceptable documentation includes receipts, invoices, canceled checks, bank statements, and account ledgers. The type of business or activity often dictates the specific records needed, such as for business expenses, charitable contributions, medical expenses, and travel and entertainment costs.

Taxpayers should generally retain records for at least three years from the date they filed their original return or two years from the date they paid the tax, whichever is later. This period aligns with the statute of limitations for the IRS to assess additional tax. If a taxpayer omits more than 25% of their gross income, the retention period extends to six years. Records related to property should be kept until the statute of limitations expires for the year in which the property is disposed of. Good record-keeping assists in monitoring financial progress, preparing financial statements, identifying income sources, tracking deductible expenses, and supporting tax return entries.

Consequences of Insufficient Documentation

A lack of proper receipts and documentation during an IRS audit can lead to significant financial repercussions. The primary consequence is the disallowance of deductions, expenses, or credits claimed on the tax return. Without receipts to prove business expenses or charitable donations, the IRS may reject these claims, which increases taxable income and results in a higher tax bill.

Beyond the increased tax liability, the IRS may assess various penalties. A common penalty is the accuracy-related penalty, which amounts to 20% of the underpayment attributable to negligence, disregard of rules, or a substantial understatement of income tax. For individuals, a substantial understatement occurs if the underreported tax exceeds the greater of 10% of the tax required to be shown on the return or $5,000. Interest will also be charged on any underpaid tax from the original due date of the return until the payment date. The interest rate on underpayments for individuals can be substantial, often calculated quarterly and compounded daily.

Presenting Alternative Evidence

While original receipts are the preferred form of substantiation, their absence does not automatically lead to a disallowed deduction. Taxpayers can present alternative forms of evidence the IRS may consider. Bank statements and credit card statements prove payment and the amount of a transaction. However, these statements may not sufficiently prove the purpose of an expense, which is crucial for deductibility. Canceled checks similarly demonstrate payment.

Other contemporaneous records created around the time of the transaction can also be helpful. This includes appointment books, calendars, mileage logs, emails, and invoices from vendors. Sworn statements or affidavits from third parties, such as vendors or clients who can corroborate transactions, may also be considered. In certain situations, the Cohan Rule may apply, which allows for reasonable estimates of expenses if there is clear evidence that the expense was incurred, even if the exact amount cannot be proven. This rule stems from a 1930 court case where a taxpayer, despite lacking receipts, demonstrated that business expenses were genuinely incurred. However, the Cohan Rule has limitations and does not apply to all types of expenses, particularly those with strict substantiation requirements.

Navigating the Audit Process Without Receipts

When an audit notice arrives, review it to understand the scope of the audit and the specific items questioned. The notice will specify the tax years under examination and the documents requested. Even without original receipts, gather all available documentation, including any alternative evidence. Organizing these documents clearly and logically can streamline the process.

Communicate cooperatively and honestly with the auditor, providing only the information and documents specifically requested. If the auditor proposes adjustments due to missing receipts, taxpayers have options: agree with the proposed changes, provide further explanations or additional evidence, or disagree. Taxpayers have the right to appeal an auditor’s decision if an agreement cannot be reached. This appeal process typically involves filing a written protest within 30 days of receiving the audit findings and may lead to a hearing with an independent IRS Office of Appeals. Taxpayers also have the right to representation by a qualified tax professional, such as a CPA, Enrolled Agent, or tax attorney. Professional representation can be invaluable in presenting the case effectively and navigating procedural complexities.