A recent article from the Washington Post cites data from 2019, where 1.3% of taxpayers earning one million to five million dollars were audited. Further, only 0.2% of those earning $25,000 to $50,000 were audited.
You must understand this is not a personal attack when you receive an audit letter. The IRS has a computer system that flags inconsistencies, and they’re required to follow up on those alerts.
What happens if you get audited and don’t have receipts? A tax audit can be incredibly stressful, but you can get through it. Here is everything you should know.
What Happens if You Get an Audit Letter and Don’t Have Receipts?
During the IRS audit, they may let you reconstruct your expenses. This helps taxpayers verify their deductions with information other than tax receipts. They will not prosecute you for a lost receipt.
However, the IRS could decide not to allow deductions of services or items that you do not have a receipt for. Another option is that they could enable expense deductions without receipts at a minimum.
The only requirement that they have for the IRS audit is that you give evidence that the deductions you have are valid throughout their audit process.
What to Do if You’re Audited
There are three possible ways the IRS can audit you: correspondence by mail, at an IRS office, or in person. During this audit, they will ask you to explain your tax return and position.
You must respond to the IRS inquiries. You will want to understand the scope of their audit before you begin researching your position. Not only that, but you should prepare your responses in advance, to help you clear up any inconsistencies that the IRS may see.
Consider Whether It’s a Business Expense
This will be pivotal to the audit process. You must prove that you have taken reasonable business expenses, which must fall under the Internal Revenue Code, Section 162.
For your expense to be approved, it must satisfy one of the IRS’s two conditions. The first condition is that your business expense is “ordinary.” Most companies in your industry would see this as a typical deduction.
The second condition is that the business expense is “necessary.” Your business needs it to operate.
Here are good examples of business expenses:
- Banking fees
- Charitable contributions
- Business licenses and permits
- Business taxes
- Company vehicles
- Business travel and meals
- Depreciation costs
- Equipment purchases and rental fees
- Employee education
- Maintenance and repair
- Employee retirement plans
- Home office and office furnishings
- Marketing and advertising costs
- Legal and professional fees
- Internet services
- Membership dues
Knowing what you can deduct is essential, as is tracking these business expenses during the year. Always try to attach a receipt to your records in the future.
Reconstruct Records to the Best of Your Ability
When you do not have tax receipts, you do not need to panic as long as you have other supporting documentation. This is vital for lending support to entries in your books. You can use supporting documents like:
- Cancelled checks
- Deposit slips
- Paid bills
- Sales slips
This is how a taxpayer can prove value. The IRS must also accept digital forms of proof. You can supply bank and credit card statements for your write-offs.
Understand the Cohan Rule
The Cohan rule allows taxpayers to give the IRS a reasonable estimate when they cannot provide proof of the actual expenses. However, there must be a factual basis for your claim. Therefore, you can claim some tax deductions with an estimate.
It does not mean you should not keep tax receipts because it can simplify a tax audit.
There are multiple circumstances where you would need to estimate your expenses. Usually, the reason is that the documents never existed, are incomplete, or have been lost or destroyed.
Go Through Your E-Mails
You can sift through emails to help support your deductions, looking for subscriptions, receipts, invoices, etc. It helps if you file these annually to make the audit process more manageable.
However, it is crucial to understand that, through the Stored Communications Act, the IRS can get electronic evidence, including emails. They need a search warrant or subpoena, but they can access it.
Look Through Social Media for Certain Transactions
Your social media account should have receipts, including subscriptions and advertising spending. Also, your number of posts and comments can show the time invested in marketing and advertising. When you need support for your deductions, review your social media accounts.
If you recently took a business trip and posted pictures about your travels, this will be on your social media. This can help support claims for deductions for business travel.
While your social media accounts should support your claims, just like emails, the IRS could obtain a search warrant or subpoena should they need to search your social media account.
Check Your Bank and Payment Accounts
Often, a tax audit means the IRS will want to run a bank deposit analysis. When these analyses occur, the IRS asks for bank records. They will compare your income with net deposits to the amount reported on the tax return, and you may receive penalties if you fail to provide your bank account details.
You must match your statements to your bank accounts during the audit process. A paper trail provides evidence of what you are claiming.
Therefore, when you submit your taxes, you must match your filing to your bank account statements. This should be a vital resource for you to survive an IRS audit.
Consult Your Appointments and Calendars
It can be challenging to find documentation when you can’t remember what an expense was for. It would help if you went through various digital locations to jog your memory. A calendar that houses your appointments is perfect.
You can have a tremendous number of meetings each year. It is impossible to remember them all. Going through your calendar and navigating each event will help with memory and coincide with your emails and bank statements.
Matching your calendar dates to other supporting documentation is a way to help meet IRS requirements when you are missing tax receipts.
Reach Back Out to Vendors
Your vendors value your business and always want to support you and your business. Vendors have business records, including transactions on sales and monthly invoices. After all, they report to the IRS the same way you do.
Not only that, but they need excellent record-keeping in case of returns, disputes, etc. Plus, keeping a record of sales and transactions helps marketers when they need to promote a new product or service or personalize their marketing messages to customers.
When you lose your tax receipts, call, or email your vendors and ask them to send records of your transactions. You will likely receive what you are looking for quickly.
Piece Together Mileage Records
When you retrospectively create a log, you must begin with a few fixed details and circumstances. Data must be accurately entered; doing this on paper can be challenging if you reconstruct many miles. For an extensive report, you should consider looking for a software application to assist you.
Begin marketing the date and amount of fuel you used for the month. (You should be keeping a log by month.)
There are one of two ways to report fuel. You could include the actual expense, although it would help if you had tax receipts. The second method is using the standard mileage rate, which is incredibly useful when you have lost supporting documentation.
Remember that you cannot report on your taxes more mileage than driving would be possible. This is based on the size of your tank and the amount refueled. Based on the type of car you drive, you can’t drive over what one tank of gas will accommodate.
Take Measurements for Your Home Office
You could take home office deductions if you meet the IRS requirements. To qualify, you must be an independent contractor or self-employed. An employee would not be able to take a deduction for their home office.
You could deduct some expenses for those who meet the requirements, but only in the following cases. First, your home would need to be your principal place of business.
The rules are straightforward. This means that you regularly or exclusively use your home as a principal location for business. Another qualification is if you meet with clients, patients, or customers at your home regularly.
It could be a separate structure, too, that is not attached to the house, but you use it for business often or exclusively. Even gig work you pick up sometimes can qualify for this deduction if you are self-employed.
Other qualifications for a home office include a daycare facility, rental use, or you store inventory or product samples there. “Home” refers to a house, condominium, apartment, mobile home, or boat. Detached structures that qualify include a studio, garage, barn, or greenhouse.
Ask for a Postponement
An audit letter will likely include a number that you can call. There should also be an address where you can send written requests. If you need more time to collect your proof, consider asking for a postponement.
However, when you submit a request to the IRS, whether verbal or written, you must explain your circumstances. The only way to approve a postponement is to provide a sound reason for needing one.
The IRS could ask for supporting documentation regarding your request. Although, if you have a legitimate cause, the IRS will likely grant your request to postpone the audit.
Ask for the postponement as soon as possible. If you choose to wait until the last minute, you risk having the IRS take additional actions against you.
Hire the Help of a Professional
Working with a professional accountant can prevent a tax audit from occurring in the first place. Once you receive the audit letter, even if you did not have professional help filing your taxes, you must get assistance now.
Hiring a professional to help you will save time during the IRS audit. That is because working with experts means they have experience and can find answers quickly. They will manage each part of the audit process efficiently.
Another superb benefit is that a professional will help you avoid costly mistakes in the audit process. Preparing or submitting forms incorrectly can lead to extra costs. Further, the IRS could misread the error as intentional and think you are hiding something.
With an expert, you can play it safe with tax audits. It is more discreet because they will meet at the professional’s location instead of visiting your home or business.
Understand the IRS Audit Process
Typically, you have 30 days to respond once you receive an audit letter. This is the time to seek the counsel of a tax attorney. Do not wait to find help!
Once you get a tax attorney, you must prepare the requested documents. Then, you will present your documents to the IRS. After this, the IRS will give you notice of their findings.
When you review their findings, you can accept or challenge them. You have 30 days to appeal unless you file for an extension. Eventually, there will be a resolution to the tax audit.
A tax audit would only become a criminal investigation if you engaged in tax evasion, tax fraud, offshore bank accounts, hidden foreign assets, or substantial unpaid taxes. Money laundering and narcotics dealing are also criminal.
Tax returns can be audited for the past three years. This is from the date it was filed or from the date it was done, whichever is later. In tax audits, this is the statute of limitations.
Handle Your Tax Audit Head-On
What happens if you get audited and don’t have receipts? Once you receive the audit letter, you will need to find support documentation, but first, call professionals like us.
Polston Tax Resolution & Accounting can assist you when you need tax audit services. We’d love to hear from you! Sign up for a free consultation using our site or call 844-841-9857 for more information.
In June 2023, the IRS began sending millions of CP14 notices to taxpayers countrywide. Those who receive these statements typically have many questions about what they mean and how to handle them. The Polston Tax Resolution & Accounting professionals are here with the answers you need. What Is an IRS CP14 Notice? An IRS CP14...
In 2022, Americans owe a whopping $120 billion in back taxes, according to the IRS. Now some people owe a year’s worth of taxes and can quickly get back on track. At the same time, others owe years and years’ worth of taxes and face severe consequences for their unpaid taxes. Have you been worried...
Receiving a letter from the IRS or the state can be intimidating, especially if you’re unsure what the notice is for or what to do next. Fortunately, many notices are nothing to worry about and are purely informative. Below, we take a look at everything you need to do — and what not to do...
The Employee Retention Tax Credit (ERC or ERTC) is a tax credit that the United States government introduced as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act. The ERC was meant to help businesses across the country that were feeling the negative impacts of the COVID-19 pandemic. Eligible companies are still able...
If you’re trying to address your finances, the way that you handle your taxes is of the utmost importance. Individuals are responsible for both federal and state income taxes and can address their money management more prudently when they master these issues. Accounting services are worth roughly $145 billion as a market today. This means...