Navigating an IRS Tax Audit Without Receipts: What Are Your Options?

Every year, almost 6 million people are questioned about their tax returns by the Internal Revenue Service (IRS), either through an audit or via a verification notice. As the tax season comes, people keep asking questions like “How do you know if you are being audited? and “What is an IRS audit notice?” keep circling around town. 

Not to mention, an IRS audit notice is enough to make your heart skip a beat. On top of that, if you realize that you don’t have all the necessary receipts to present, the situation becomes worse! But, take a deep breath. While having receipts certainly makes an audit smoother, not having them doesn’t mean you’re out of options.

Handling Situations without Receipts: Steps to Take When Documentation is Absent

Keeping records and preserving all receipts does streamline the usually very time-consuming process of an IRS audit. However, what happens when you don’t have access to these documents during an audit? Rest assured, the Internal Revenue Service (IRS) does provide ways to prove your tax return with alternative forms of evidence. 

IRS auditors, including revenue-enrolled agents, can verify your tax information using different document types. 

  • Canceled checks
  • Handwritten records
  • Bank statements
  • Both debit and credit card statements 

These are some of the key components that can serve as legitimate proofs for tax verification.

But what if an audit is underway, and you have neither receipts nor other forms of supporting evidence? In these cases, the Internal Revenue Service (IRS) can reject your deductions for the expenses in question. 

This results in a substantial increase in your declared gross income before the IRS determines your applicable tax bracket. This means that a rejection of deductions could land many taxpayers in a higher tax bracket. It translates to heftier tax payments for that specific year. 

Furthermore, situations, where there are no receipts or other documentation to support deductions, could lead to the imposition of tax penalties. That’s why, it is very imperative to understand the possible consequences, and if needed, seek professional assistance to navigate the complexities of an IRS audit.

Steps to take when you have missing Documentation:

  • Recall the method of payment

Think about how you paid for that transaction. Did you by any chance use a debit card or a credit card? Did you write them a check? These are the methods that tend to create their own paper trails. That means you can contact your bank or credit card company to request past statements.

  • Invoking the Cohan Rule

Are you navigating an IRS audit without receipts? If yes, your first move must be involving a longstanding principle, known as the Cohan Rule. This rule comes from the historic case, Cohan v. Commissioner of Internal Revenue. Despite paying his business expenses in cash without receipt evidence, Cohan still successfully claimed deductions on his tax returns, following an appeal against the initial court ruling.

Without the Cohan Rule, countless business owners would think it’s impossible to claim tax deductions for expenditures without a receipt or necessary documentation. Invoking this rule enables claiming of certain business expenses, even without proof of purchase. However, the IRS stipulates that these expenses should be credible and reasonable. Meaning that it’s vital to ensure that any deductions claimed under the Cohan Rule can withstand scrutiny for their validity and credibility.

  • Ask Vendors

Automated payment systems in small and large businesses can help individuals claim certain deductions without the necessity of receipts. Simply, you should contact vendors and ask them to find copies of invoices or receipts.

  • Bank Statements

If you want to review all records without receipts, the best thing to do is to combine your bank statements with financial records. It is here that you’ll find all the necessary expenses. So, make sure to go through your debit card, credit card, and bank statements. Also, never ignore canceled checks.

  • Check mobile records and social media history

Want the date of the offered services? Consider combining your phone records with your social media app history. Some of the valuable information can be found on social media apps too.

A former IRS agent can provide valuable insights into the audit process, helping you understand what to expect and how to respond – especially if you don’t have the receipts on you!

Understanding the IRS Audit Selection Process: Factors Influencing Selections

Wondering how the IRS selects people for an audit? Math mistakes, concealed income, deductions, and round numbers often raise red flags. Ever wondered, ‘how do I know if I’m being audited?’ Well, a letter arrives in the form of a notice or letter from the IRS. To recognize what seems off, the IRS puts up various steps to check whether you will be audited next. There are multiple factors that the IRS considers before selecting you in its audit process. So, what exactly do they consider before selecting you?
Making Math Error
If you have made errors in math when creating the return. Don’t accidentally write 5, instead of a 7. Despite whether your mistake was unintentional, the IRS won’t cut it!
Forgetting Part of Income

It’s not wise to leave a part of your income when filing. Consider this: You work full-time at a cafe as a barista and on the side, you’ve found a lucrative hobby writing articles for a coffee connoisseur magazine. You might feel the urge to report only the W-2 income from your barista job, conveniently forgetting the supplemental income you earn through freelance writing (documented on your Form 1099).

Form 1099 accounts for non-wage earnings like freelance payments, stock dividends, and interest. Essentially, 1099-NEC, a particular type of Form 1099, si what reports the sums of independent contractors.However, here’s the twist: the IRS is already one step ahead. The income specified on your 1099 isn’t a secret, as the magazine also sends a copy to the IRS. So, it’s merely a matter of time before it comes to light, thus notifying you of an audit.

Overusing Schedule C Losses

This is for those who are self-employed. Considering you’re your own boss, it might be tempting to downplay income by declaring personal expenditures as business-related expenses. However, before you decide to deduct, think about the scrutiny that an abundance of reported losses might trigger. Well, it’s a pretty big red flag for the IRS!

Excessive losses reported on your Schedule C could raise eyebrows. They might start questioning how your business is still afloat despite continuous losses. For a comprehensive understanding of what constitutes a legitimate business expense, refer to IRS Publication 535.

Excessive Claims on Charitable Donations

Making generous donations to charity indeed offers substantial tax deductions. However, there is a golden rule: “Don’t claim what you can’t prove”. Don’t have the right paperwork to prove your contribution? Then it’s best not to claim it. This is as simple as it gets. Assuming you’re claiming $10,000 in charitable deductions on a $40,000 salary, it’s definitely going to raise questions. So, avoid adding your name to this big red flag!

Are you using round numbers?

The chances are that the figures on your 1040 form or other tax paperwork won’t really exhibit nice and neat round whole hundreds. While tallying, you must be precise, and avoid rough estimates from the get-go. You can round up to the very closest dollar, rather than the nearest hundred. For instance, let’s say you’re a freelance writer claiming a $495.85 laptop as a business expense, round that to $495, not $500. Quite literally, $500 may immediately seem out of place, and the IRS could ask you for evidence.

The question, ‘how do you know if IRS audits you?,’ usually pops up among taxpayers. The IRS is going to notify you via a mail notice if they’ve selected your return for an audit.

Demystifying the Audit Process: What to Expect During an IRS Audit?

Have you received a letter of audit from IRS? It’s definitely scary and we understand it. More than scary, it is often a very stressful experience. However, it is important to remember that the IRS is simply doing its job to ensure that taxpayers are paying the correct amount of taxes. The frequency of how often does the IRS audit varies each year, influenced by factors like your reported income, the type of return you file, and random selection.

Assuming that you’re selected for an audit, there are a few things you can do to prepare and make the process move smoothly.

Here is a brief overview of what to expect during an IRS audit:

  • You are going to receive a letter from the IRS that briefly notifies you that your tax return has been selected for audit.
  • The auditor will schedule an appointment with you to review your tax return.
  • The auditor is going to question you about the income, deductions, and other areas of your tax return. It’s best to answer the auditor’s questions honestly and in a clear and concise way.
  • If asked, be prepared to offer copies of your tax records and documentation.
  • The auditor may make changes to your tax return.
  • If you disagree with the auditor’s changes, you can appeal the decision.

Considering that you indeed recognized the mishap on your tax return, communicate with the IRS. An IRS compromise, officially known as an Offer in Compromise, is an agreement between a taxpayer and the IRS to settle the taxpayer’s tax liabilities for less than the full amount owed. Keep in mind, at times of really difficult situations, the IRS does help!

But, want more details about what you can expect during an Audit? Here’s a detailed sneak peek:

  1. Planning the audit: The auditor is going to look into the company’s management to discuss the audit scope and the specific corners that’ll be examined.
  2. Gathering evidence: The auditor is then going to assess the company’s financial statements, such as reviewing financial documents, interviewing company personnel, and performing analytical procedures.
  3. Analyzing the evidence: The auditor will go through the evidence whether there are any material misstatements in the financial statements.
  4. Forming an opinion: Based on the evidence, the auditor is going to build an opinion on whether the financial statements are presented fairly, in all material respects, as per the Generally Accepted Accounting Principles (GAAP).
  5. Communicating the results: Now, the auditor will draft a report to the company’s shareholders and board of directors, which will include their opinion on the financial statements.

When understanding ‘how does IRS decide who to audit,’ keep in mind that selection for an audit can be random, or it can be triggered by anomalies in your tax return. So, better safe, than sorry!

Post-Audit Procedures: What Happens After Completing an IRS Audit

With the IRS audit complete, you might question, “What’s next?” The completion of an audit doesn’t necessarily mean the end of the process. Instead, it just pushes you into the next stage: the “Post-audit Procedure”

Once the IRS completes the audit process, one of two scenarios is going to take place. Either they’ll accept your tax return as it was filed, meaning no changes are required, or they’ll propose changes on the basis of what they found. 

If changes are proposed, you will get a comprehensive report that describes the modifications, and an “examination report” which shows how these changes impact your tax and refund amounts. 

This is when you’ve the freedom to either agree or disagree with these changes. Assuming you concur with the IRS’s findings, you need to sign an examination report or an agreement form they present. You’ll also need to pay any money owed, and the process will conclude.

But, if you disagree with the changes, the real post-audit procedure starts. You can request a one-to-one consultation with the IRS manager, mediate the dispute through the IRS’s Fast Track Mediation program, or you can choose to file an appeal considering that you got a ‘Statutory Notice of Deficiency’. 

During the post-audit process, you should know your rights and what responsibilities lie in your hand. This also means that you can challenge the IRS’s findings and get professional representation to guide you through this phase.

Just knowing what you can expect in a post-audit can minimize stress. This way you can prepare yourself to take the necessary steps to find common ground and get resolution. But, how long can IRS audit taxes? Typically, the IRS can include returns filed within the last three years in an audit, but if they identify substantial errors, they may go back further up to six years.

Bottom Line

An IRS tax audit can seem like an uphill battle, particularly if you don’t have the right receipts. Yet, even in the face of such a challenge, you’re not without options! And that’s something you need to remember.

In cases like these, keep an open communication channel with the IRS, informing them of the missing documentation. This way you can work proactively to provide alternative proof wherever possible. Receiving an audit from IRS can be intimidating, but remember, it’s just a review of your tax return to ensure accuracy.

Frankly, the absence of receipts doesn’t necessarily mean you’re in trouble. The Cohan Rule, for example, can be invoked, enabling you to estimate certain business expenses. But, here’s the deal: they should be credible and reasonable enough.

Also, have you thought about professional assistance? Well, by taking help from the right people, you just go on to making the right decisions moving forward. How? You’ve guidance from the people who know the drill! It’s always with the right preparation and transparency that you can ace any tax problem, despite what it is.

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Author

Joe Hopkins

Joe has 25+ years as a Certified Public Accountant licensed in the State of Texas and solving IRS problems. Current member with the American Institute of Certified Public Accountants (AICPA), Texas Society of CPA’s (TSCPA), National Society of Accountants (NSA), Bachelor’s degree in accounting (BBA), Master’s degree in Business Administration (MBA) at Texas A&M Corpus Christi. Experience in a variety of industries as Controller, CFO and tax resolution issues for both business and personal tax cases.