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

If you are audited and do not have receipts, you increase the risk of owing more money to the IRS.

However, you may still win an IRS audit without receipts and this post examines this topic in detail.

Sadly, many small business owners claim tax deductions without keeping up with their receipts.

Meanwhile, the IRS audits thousands of tax returns every year. In any given year, your name could be called for an audit.

As a small business, your chances of being audited are already greater than the average person.

Getting audited by the IRS can be really stressful, especially if you don’t have receipts for the expenses or deductions you claimed on your tax return. 

The IRS can disallow your tax deductions. They can add additional fines and interest. They may audit you more frequently. The list goes on.

And many people find themselves in this situation. 

Don’t worry though. Even without receipts, you can get through an IRS audit. 

The audit is just a review of your tax return, not a trial in court. The IRS will not throw you in jail for honest mistakes.

However, if you cannot prove your tax deductions, the IRS may not approve all the business expenses or deductions you claimed. 

This means you could end up owing more taxes.

But there are steps you can take to minimize the damage. With the right approach, you can handle an IRS audit without receipts and hopefully avoid a significant new tax bill.

What is an IRS Audit?

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An IRS audit is when the IRS checks your financial records and tax return to make sure you reported everything correctly and paid the right amount of taxes.

There are three ways an audit can end:

1. No change: This means the IRS reviewed everything, and they agree with what you reported on your tax return. No changes need to be made.

2. Agreed: The IRS found something they think needs to be changed on your tax return, and you understand and agree with their changes.

3. Disagreed: The IRS wants to make changes to your tax return, you understand their reasoning but disagree with their changes.

The best way to ensure that an IRS audit ends favorably without having receipts is by having some sort of recordkeeping system.

What is a Recordkeeping System?

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A record-keeping system, also known as an accounting system, is the method or process you use to track and record all the financial transactions related to your business. 

Basically, every time money comes into or goes out of your business, it needs to be recorded. 

Every transaction should be recorded.

This includes income from sales, expenses for supplies, payments to employees, etc. All of these transactions make up your business records.

Fortunately, the IRS does not specify how you must keep records. However, having an organized system is crucial. 

In ancient time, businesses used pen and paper ledgers, then graduated to spreadsheets. 

Today, accounting software like QuickBooks can automate much of the recordkeeping process, making it easier.

The IRS requires you to have a record-keeping system that clearly shows your income, expenses, deductions, and credits. 

Most small businesses use their business checking account as the main source for recording transactions.

Some key points about recordkeeping systems:

• It should provide a summary of all business transactions in your books (e.g. journals, ledgers)
• It can be physical books/ledgers or an electronic/software system
• Electronic systems must meet the same recordkeeping principles as physical books
• The system should be suited to your specific business type and needs
• Proper records are critical for tax purposes and substantiating your filings

The method doesn’t matter as much as having an organized, comprehensive system to track your business’s financial activity.

What Kind of Records Should I Keep?

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Facing an audit without receipts will be tricky, as these documents are vital for verifying the expenses claimed on your tax returns.

Without them, you may need to provide alternative forms of documentation or explanations for your expenses.

This preparation forms the backbone of effective recordkeeping, ensuring you’re ready for any scrutiny your financial records might attract. 

Here are the main types of records you should keep for your business:

1. Gross receipts are the income you receive from your business.

• Cash register tapes
• Bank deposit slips/info for cash and credit sales
• Receipt books
• Invoices
• 1099-MISC forms received

2. Purchases are the items you buy and resell to customers.

• Canceled checks, bank statements for payments
• Cash register receipts
• Credit card statements
• Invoices from vendors

3. Expenses are the costs you incur (other than purchases) to carry on your business.

• Canceled checks, bank statements
• Cash register receipts
• Credit card statements
• Invoices for expenses

4. Travel, Transportation, Entertainment, Gift Expense Records

• Documentation satisfying the substantiation requirements in Publication 463
• These include the standard mileage rate, actual car expenses, standard meal allowance, etc.

5. Assets are the property, such as machinery and furniture, that you own and use in your business.

• Purchase documents (invoices, canceled checks, etc.)
• Sale documents for assets you disposed of
• Depreciation schedules
• Records tracking asset use and improvements

6. Employment Tax Records

Be sure to keep supporting documents that show the amount, date, description, and proof of payment for all your business income, expenses, purchases, and asset transactions. 

This allows you to support the figures on your tax returns.

Missing Receipts? No Problem (Maybe)

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If the Internal Revenue Service (IRS) contacts you about an audit and you lack receipts, first—stay calm. 

You’re not alone; many business owners overlook saving receipts when filing tax returns. 

While organized records simplify the audit process, people manage to get through audits daily, even with incomplete records.

You’ll need to dedicate extra effort to find alternative proof for receipts. 

This situation is where understanding and applying the Cohan rule can be particularly beneficial.

What Is the Cohan Rule?

The Cohan rule is a lifeline for taxpayers undergoing an audit without receipts, allowing them to claim reasonable expenses in the absence of supporting documents. 

Originating from a 1930 Court of Appeals for the Second Circuit ruling, this principle came to the rescue of taxpayers when it determined that business expenses could be claimed without receipts, provided they are proven reasonable and credible.

While invoking the Cohan rule can offer relief, keep in mind that it doesn’t permit the claim of any expense without documentation.

Instead, it enables the justification of certain business or itemized personal expenses without needing receipts, based on the premise of reasonableness and credibility.

Alternatives to Receipts

These are some of the following methods that can also be used for reconstructing expenses:

Ask Vendors for Receipts: 

Reach out to previous vendors, suppliers, and business partners to see if they can provide copies of invoices, receipts, or records of your past transactions with them.

Consult Appointment Books/Calendars: 

Review your appointment books or calendars for notes on client meetings, services rendered, travel, etc. This can help you recall potential business expenses.

Review Bank/Credit Card Statements: 

Go through your bank account and credit card statements for payment records that can substantiate qualified business expenses, even without detailed receipts.

Check Phone/Social Media Records: 

Your call logs, text messages, and social media posts may contain information that can help establish dates of services, travel, purchases, etc. related to your business expenses.

Is it Legal to Use Fake Receipts During an Audit?

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If you’re being audited and don’t have your receipts, you might feel scared, and make up fake receipts to cover your tracks.

Take note: making fake receipts is against the law. 

Instead, try your best to piece together your financial records with what you have. 

Remember, making and using fake receipts for taxes can get you into big trouble with the IRS. 

They are very strict about this and doing so could lead to fines, or even worse, jail time. So, always stick to the truth and use real information when dealing with taxes.

Reconsideration When You Have No Documentation for Tax Audit

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Once you receive an IRS audit notice, it may seem like the worst is about to happen.

In these situations, it is important to know your rights. 

You may challenge the audit results if you disagree with the findings or have additional information. 

This also applies if you do not have a receipt to support your deduction claims.

Now, most people don’t like dealing with the IRS on a voluntary basis. 

Some feel that going against the IRS assessment will only do more harm than good, so they accept it and end up paying excessive amounts that could have otherwise been reduced. 

With the help of a good tax lawyer, such problems can be avoided.

Often, taxpayers are unaware of the IRS audit appeal and reconsideration process. 

Once they receive the assessment, they believe it can’t be challenged and they’ll have to pay the entire amount. 

However, a taxpayer does have the right to request audit reconsideration if they have a valid reason.

You can submit one if:

1) You did not appear for your initial audit

2) You moved and did not receive IRS correspondence

3) You now have new information to present that you did not provide during your original audit

4) You disagree with the audit assessment

Basically, the lack of documentation during the original audit does not prevent you from requesting reconsideration later if you can provide valid reasons for disagreeing with the audit results.

Steps to Request an IRS Audit Reconsideration

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Step 1: Review the examination report and gather new documentation supporting your position for the items you disagree with. 

Your reconsideration may be accepted if:

• You provide new information not previously considered
• You filed a return after the IRS completed one for you
• You believe the IRS made a computational/processing error
• The liability is unpaid or credits are denied
• Note: If already paid in full, file Form 1040X instead

Step 2: Make copies of the new documentation. Attach to your letter an explanation of which changes you want reconsidered.

Ensure that you are clear as to which changes you want them to consider.

• Use Form 12661 to explain the disputed issues
• Include exam report Form 4549 if available
• Provide contact information
• Do not send original documents – originals will not be returned.

Provide complete information for each disputed issue. The IRS will request any further needed information.

Bottom Line

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Facing an IRS audit without receipts is a headache in itself, but it’s not the end of the world. 

Keep calm and take proactive steps to reconstruct your expenses using alternative documentation.

Leverage the Cohan rule to substantiate reasonable expenses, but never resort to creating fake receipts, as that’s illegal. 

If you disagree with the audit findings, request reconsideration and provide any new information you may have.

Also, consider hiring a tax professional to guide you through the process and ensure you present the strongest possible case. 

With diligence and the right approach, you can handle an audit without receipts and minimize potential penalties or additional tax liabilities.