Receiving an IRS tax audit is scary even if you keep detailed financial records – but if you haven’t kept your receipts, it can be absolutely paralyzing. If you find yourself in this situation it’s critical to create a strategy for how you’ll prove your income without incurring penalties. Remember, your financial integrity is on trial during on audit so it’s important to treat it as a serious allegation, especially if you don’t have records.
Need tax audit help? Use the links below to answer all your questions:
- What Exactly is a Tax Audit?
- Tax Audit by Mail
- Tax Audit in Person
- Does an IRS Audit Always Mena I’m in Trouble?
- How Far Back Can a Tax Audit Go?
- What Happens if You Don’t Have Receipts for an IRS Audit?
- What is the Cohan Rule?
- What Can I Use in Place of Receipts to Prove My Income?
- What Happens If I’m Found Guilty After an IRS Audit?
- How Can I Avoid an IRS Tax Audit?
- How Can I Keep Organized Records of my Income and Deductions?
- Can I Get Help With an IRS Tax Audit?
What Exactly is a Tax Audit?
When the Internal Revenue Service looks at your tax returns, they might issue an audit if they believe your reported income or deductions that are inaccurate. The main reason you would receive an audit is if they suspect you are earning a higher income from sources you haven’t reported on your returns.
Tax Audit by Mail
Typically, you’d receive an IRS audit letter in the mail informing you of the items on your return that they are questioning. Oftentimes they want to see further evidence of your income or deductions and will request for you to send documentation to prove it. Make sure to only ever send copies and always keep the original document for your records.
Tax Audit in Person
If further information is needed beyond a mailed audit, you may have to attend an in-person interview at an IRS office. Before the meeting you will receive a written request for the documents you need to provide. It’s important to note that you will never be contacted by phone for an audit – if you receive a call claiming to be an IRS audit, it is a scam and should be reported to police.
Does an IRS Audit Always Mean I’m in Trouble?
Receiving a tax audit doesn’t automatically mean the IRS believes you’ve done something wrong. Tax returns are sometimes randomly selected for research purposes that look at statistical norms. It’s also possible that your return might be audited if you are connected financially to someone who is being investigated, such as a business partner or investor.
How Far Back Can a Tax Audit Go?
An IRS audit can include your tax returns from the past three years. It is possible that older returns could be included if they think they’ve found a substantial problem. The statute of limitations for a tax return to be assessed by the IRS is typically three years, but in some cases it can be extended if an audit hasn’t been answered or resolved.
What Happens If You Don’t Have Receipts for an IRS Audit?
Step number one: don’t panic. Not having all the receipts to prove your income does not mean you will automatically be punished. Most people don’t keep perfect records of their finances, so there are plenty of ways to resolve an audit even if you don’t meet IRS receipt requirements.
What is the Cohan Rule?
The Cohan rule is the saving grace for many taxpayers who have been audited. It’s named after the Broadway star George M. Cohan who was heavily audited in the 1990s for business expenses he didn’t have proof of. Cohan took the IRS to court, and they came to the decision that the IRS had to accept the estimates of his expenses.
While this rule isn’t a miracle cure for every taxpayer who is audited, it can certainly still be invoked. Business owners can use it to deduct some of their business expenses that don’t have receipts. You will still likely be asked to show some sort of evidence of the transactions such as calendar notes, photographs, canceled checks, etc.
What Can I Use in Place of Receipts to Prove My Income?
Whether you lost your receipts, they were damaged, or you simply don’t have them, there are several documents you could use as evidence to answer an IRS audit when you have no receipts:
- Calendar logs of meetings/travel/daily tasks
- Canceled checks
- Credit/debit card statements
- Mileage records
- Photographs of events/individual items
Even if you can use the Cohan rule to your advantage in your audit, you’ll need some of the above items to prove your claims. It’s a smart idea to keep a detailed financial journal whether or not you run a business.
What Happens If I’m Found Guilty After an IRS Audit?
After a tax audit is complete, you’ll get a notification of the result within 30 days stating your charges, if any. You then have 30 days to either appeal or accept the result. If you appeal, you will take your case to an IRS appeals agent who will then make a decision based on the facts of your case.
If your appeal is denied and you are charged with owing money, there are various levels of penalties and fines depending on what the IRS found on your tax return. If you are found guilty of tax fraud, you could face severe fines and jail time.
How Can I Avoid an IRS Tax Audit?
First thing’s first: never avoid an IRS audit letter. If you receive an IRS audit and realize you have no receipts, it’s important to get your financial habits back on track. The only way to truly avoid an IRS tax audit is to submit an accurate tax return year after year. Additionally, make sure you understand the IRS receipt requirements so you can keep detailed records.
How Can I Keep Organized Records of My Income and Deductions?
There’s nothing like being audited by the IRS and realizing you have no receipts to scare you into better money management habits. Be sure to write down notes for all of your receipts so you can look back and remember exactly what the money was spent on. This is particularly important for business-related expenses since treating a major client to a day at the golf course might not come across as a necessary expense on a printed receipt.
The digital revolution has made keeping track of your receipts easier than ever – since 1997, the IRS has accepted digital receipts. Scan any paper receipts you have and save them in a folder on your computer so they’re organized in one place. It’s typically a good idea to save receipts from the past six years. In addition to scanning paper receipts, put any digital receipts that may have been sent to your email or phone in this folder as well.
Pro tip: Don’t use cash to pay for expenses. It’s much harder to prove a transaction occurred, especially if it’s with another person and not an established business. A good rule of thumb is if the expense is over $75, you should get a physical receipt for it.
Can I Get Help With an IRS Tax Audit?
If you want help resolving an IRS audit when you have no receipts, there are plenty of qualified professionals that can manage your case. Audit representation can come from an attorney, Certified Public Accountants, or an enrolled agent. This individual will then stand in on your behalf during an audit to use their professional knowledge of the IRS to help you resolve the audit.