What Happens if You Get Audited and Don't Have Receipts?

Experiencing an IRS tax audit is something that no one looks forward to doing. However, thousands of taxpayers find themselves in this position each year. From individuals to business owners, the IRS looks for signs that someone hasn’t correctly filed their tax return. If you keep detailed financial records, an IRS audit process doesn’t need to be stress-inducing.

The Purpose of an IRS Audit

The Internal Revenue Service (IRS) conducts audits to discourage people from avoiding paying their tax liability. Audits are performed when red flags signal that the taxpayer isn’t paying their full tax liability. When taxpayers perform a list of certain activities, the IRS will initiate an audit.

If you have records to verify the numbers in your tax return, then the IRS will give you a pass. If the IRS can’t verify the numbers in your return, you could owe more in taxes, plus interest and penalties.

Best Practices To Prepare for an Audit

The best course of action is to avoid triggering an audit in the first place. You can do this by filing accurate tax returns. Only take expense deductions and credits that you are entitled to. You can do this using booking software, a CPA, or other recordkeeping service. You can also work with a tax professional to prepare your income tax returns. This is especially smart for self-employed individuals and small business owners who are more prone to being audited. It is also important to keep detailed financial records by keeping copies of all business expenses, bank account statements, mileage records, and anything else that might be relevant to your finances.

Once you receive an audit notice, you need to take action. Your audit letter will outline what you need to do and the deadline for that action. Preparing for your audit by having your documents in order will make you more reputable to the IRS auditor.

John Pontius, a top-rated tax attorney in Rockville, Maryland, explains that preparing for an audit begins when you file your tax return. “The best way to have a good audit would be to have a tax professional prepare your tax returns with good books and records to start with. That is the best first step.”

What If I Don’t Have Receipts for Taxes?

Despite your best efforts, you may discover that you are missing receipts. Don’t panic; you may be able to provide alternative documentation. Bank account records or credit card statements are a good place to start. If you don’t have these, you could try to reconstruct your records with additional information.

Perhaps you have cell phone records that validate your contact with a vendor phone number to support expenses for business purposes. You could provide your business calendar or appointment book that documents your travel itinerary. If you need to validate entertainment expenses, you may have a social media history showing that you ordered certain dishes at a particular restaurant.

Cohan Rule

If you do not have the receipts for certain types of expenses, the Cohan Rule might be able to protect you. Under this rule, taxpayers can claim a reasonable amount for their expenses based on factual evidence, even if they cannot produce the associated receipt. This rule is the result of a 1930 case, Cohan v. Commissioner. George M. Cohan was a famous Broadway writer and publisher. He kept abysmal financial records but was allowed to take deductions based on close estimations. The IRS acknowledged that expecting strict proof of business expenses isn’t always possible.

This isn’t a free pass for anyone who doesn’t have receipts. For the Cohal Rule to apply, the taxpayer being audited must be able to adequately establish that they have a right to the claimed deduction. They must also be able to provide some form of validation or quantifier for their estimated amount.

Does the IRS Verify Receipts During an Audit?

The IRS asks for receipts to verify the claims made in your tax return. If the IRS chooses to do a deeper investigation, IRS auditors will verify the receipts that you provide them. The worst thing you can do is provide the IRS agent with falsified receipts. At best, you will face additional fines and penalties. At worst, the IRS agent will forward their findings to the appropriate agency, and a criminal investigation will begin. Then, you could end up with a fraud conviction and jail time.

IRS Audit Without Receipts: Potential Outcomes

There are three possible outcomes from an IRS audit.

Option 1: No Change in Your Tax Liability

The first option is there is no change in your tax liability. The IRS office will determine that you have the required documentation to validate your claimed tax deductions and credits. It is unlikely that you would disagree with this determination.

Option 2: IRS Determines Your Tax Return Should Be Changed

The second determination is when the IRS decides that your tax return should be changed. This could be because you are owed an additional tax return or that you owe additional taxes. The taxpayer agrees with the IRS’s determination and either accepts the additional return or makes the additional owed payment.

Option 3: Disputing an IRS Determination

The third potential outcome is that the IRS will make a determination, and the taxpayer will dispute the determination. It is unlikely that a taxpayer will dispute receiving an additional tax return. However, a taxpayer would likely dispute a determination of higher taxable income that results in an additional tax bill.

Once you have been audited and the IRS finds issues with your tax return, you are more likely to be audited again in the future.

Potential Criminal Tax Court Case

For the majority of people who get audited, the IRS understands that mistakes happen. The tax code is detailed and can be confusing. It won’t pursue a criminal case. However, if the IRS agent suspects intentional behavior, they may forward their investigation findings to initiate a criminal investigation. This will happen in addition to the Tax audit. The taxpayer could face additional penalties and even jail time if convicted of tax fraud or another crime.

Appealing the Outcome

If you disagree with the determination issued by the IRS, you can appeal. You have 30 days to file your appeal, so you shouldn’t wait if you intend to do so. Speaking with a tax pro can help you form a solid case explaining why you disagree with the determination. Your appeal must be in writing and include factual arguments with supporting evidence as to why you disagree with the determination. It can take up to 120 days to hear a response to your appeal.

Pontius explains your options when you disagree with the IRS audit report. “You can either accept the audit report or you can perhaps request a manager conference. If that doesn’t work, you could potentially go to IRS appeals. If not, you could potentially go to the U.S. tax court to challenge there.”

Find Experienced Legal Help

If you find yourself facing an IRS audit, the first thing to do is protect yourself. Begin by gathering all of your documentation. Focus on records the IRS listed in the audit notice that it wanted to inspect. It can also be helpful to speak with a tax attorney. These professionals are well-versed in tax law and can explain your legal rights and options. Having audit representation can help your audit process go smoother. Your lawyer will guide you in providing the most compelling evidence to support the claims made in your tax return.

Visit the Super Lawyers directory to begin your search for an experienced tax attorney. For more information, read our guides on tax law.