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

An IRS audit can be challenging, raising concerns about financial records. Many worry about missing receipts for claimed deductions. Understanding documentation expectations is important for navigating such a review. This article explores strategies for addressing missing receipts during an audit.

The IRS Perspective on Missing Receipts

The Internal Revenue Service (IRS) requires taxpayers to maintain adequate records to support the income, deductions, credits, or other items reported on their tax returns. This requirement is rooted in the principle that the burden of proof rests with the taxpayer to substantiate their claims.

When traditional receipts are unavailable, the IRS may disallow deductions or credits if proper substantiation is lacking. Internal Revenue Code Section 162 stipulates that ordinary and necessary business expenses must be proven. Section 274 imposes strict substantiation requirements for certain expenses like travel, entertainment, and gifts, often requiring detailed records of the amount, time, place, and business purpose. Charitable contributions, under Section 170, also have specific documentation thresholds.

Without sufficient documentation, the IRS can adjust a taxpayer’s liability, leading to an increase in taxes owed. Taxpayers may also face penalties. For example, an accuracy-related penalty of 20% may be imposed on underpayments attributable to negligence or substantial understatement of income tax. Interest also accrues on underpayments from the original due date of the tax return until the tax is paid in full.

Presenting Alternative Documentation

Taxpayers can present alternative forms of documentation to substantiate claimed expenses. Financial records such as bank statements and credit card statements can serve as strong evidence, showing the date, payee, and amount of a transaction. These documents can corroborate the existence of an expense, even if they do not detail the specific items purchased.

Cancelled checks and invoices provide additional layers of proof, often containing more specific information about the nature of the transaction. For business-related expenses, detailed mileage logs can substantiate vehicle use, while calendars or appointment books can support travel or meeting times. In certain situations, emails or other correspondence related to a transaction might help establish its business purpose.

Before-and-after photographs can support claims for property improvements or casualty losses. Third-party confirmations, such as letters from vendors or clients, might verify services rendered or goods received. In instances of cash transactions where traditional receipts are genuinely impossible to obtain, a sworn affidavit, while not preferred, may be considered by the IRS, particularly for small, infrequent expenses.

The effectiveness of alternative documentation depends on its ability to correlate directly with the expense being claimed and to provide a clear audit trail. Organizing these documents by expense category and tax year, and clearly linking them to the corresponding entries on the tax return, can significantly strengthen a taxpayer’s position during an audit.

Navigating the Audit Process

Upon receiving an audit notice, taxpayers should review the notice to understand the scope and reason for the examination. The notice will specify the tax years being audited and the particular items or deductions under scrutiny. Respond to the IRS within the timeframe indicated in the notice.

Taxpayers can respond by mail or schedule an in-person meeting. During the audit meeting or correspondence, the taxpayer will present the prepared documentation. Provide only the requested information and avoid offering extraneous details that could broaden the scope of the audit.

Professional representation can be beneficial during an audit. An Enrolled Agent (EA), Certified Public Accountant (CPA), or tax attorney can communicate directly with the IRS on the taxpayer’s behalf, ensuring that responses are accurate and appropriately presented. These professionals can also help interpret IRS requests and navigate the audit procedures effectively.

After the examination, the IRS will issue findings. If a taxpayer agrees with the findings, they can sign an agreement form. If there is disagreement, taxpayers have the right to appeal within the IRS, which involves a review by an independent appeals officer. Should an agreement not be reached at the appeals level, taxpayers may petition the U.S. Tax Court to dispute the IRS’s determination.

Proactive Record Keeping

Proactive record keeping prevents challenges during a potential audit. Digital scanning of receipts immediately after a purchase is a recommended practice, allowing for electronic storage that is less prone to loss or damage than paper copies. Various accounting software programs and mobile applications are available that facilitate the capture and categorization of financial transactions and receipts.

Maintaining detailed logs for specific deductible expenses, such as business mileage or home office use, ensures that all necessary information is recorded contemporaneously. For mileage, this includes the date, destination, purpose, and odometer readings. For home office deductions, records should substantiate the exclusive and regular use of a portion of the home for business. Consistently categorizing and backing up financial documents in a systematic manner creates an organized and easily retrievable record.

Understanding recommended retention periods for different types of records is also important. For most tax records, the IRS recommends keeping them for three years from the date you filed your original return or two years from the date you paid the tax, whichever is later. Records related to bad debt deductions or worthless securities should be kept for seven years. Records pertaining to property, such as those used to figure the basis of property, should be kept indefinitely.