What Happens If You’re Audited Without Receipts?

Is the Internal Revenue Service (IRS) requesting a tax audit, but you no longer have the receipts to back up your expenses?

Facing an audit without receipts is a common issue among taxpayers. The good news is that you can still successfully navigate an audit, even if your record keeping is not on par.

In this post, we at Seattle Legal Services discuss how you should approach an IRS audit without receipts. We also outline the most common outcomes of audits when taxpayers do not have receipts.

IRS Audit – An Overview

The IRS conducts audits to verify the accuracy of taxpayers’ tax returns. If the IRS sends you an audit notification, it wants to ensure you reported all income, claimed expenses and deductions correctly, and complied with all relevant tax laws. 

An audit’s scope can vary from a simple review of a few items on your return to a comprehensive examination of your financial situation. Most audits focus on specific issues or discrepancies identified by the IRS’s automated systems.

Audits are very serious but keep in mind that an audit is a review, not an investigation or trial. If the IRS detects an error or discrepancy, you may need to pay additional taxes, interest, and penalties. However, you can appeal the decision if you disagree with the audit findings.

Reasons for an Audit

The IRS may have several reasons for sending you an audit request:

• Random selection: The IRS chose your return randomly for audit through a statistical formula that compares returns against norms for similar returns.
• Document matching: The IRS compared your return with information that employers, banks, and other third parties reported on forms like W-2s and 1099s and detected a discrepancy. 
• High income: If you earn a relatively high income, an audit is more likely because of a more complex tax situation and a higher potential for errors or tax avoidance.
• Large deductions or credits: Claiming deductions or credits significantly higher than average for your income level can trigger an audit.
• Cash businesses: If your business deals primarily in cash, the IRS may audit you to ensure you do not underreport income. 
• Foreign accounts: Having financial accounts or assets in other countries can increase the likelihood of an audit, especially if you are not compliant with reporting requirements.
• Self-employment: Self-employed individuals and freelancers often have more opportunities to underreport income or overstate deductions, making them more prone to audits.
• Amended returns: Filing an amended return can sometimes trigger a review, especially if it results in a significant refund.
• Prior audit history: If the IRS has audited you before and made adjustments to your return, the agency is more likely to audit you again.
• Related examinations: If the IRS is auditing a business partner, investor, or another related party, it may also audit you as part of that examination.
• High gambling losses: If you consistently report high gambling losses and minimal or no wins, that may be enough to warrant an audit that allows the IRS to look for unreported gambling winnings.

An audit request from the IRS does not imply wrongdoing. Depending on the IRS’s findings, the review may even result in a refund. If you feel like the situation is straightforward and you can easily reply to the notice, you may want to represent yourself. However, if you have any doubts or questions, you may want to reach out to a tax attorney.

IRS Receipt Requests During an Audit

The IRS can audit business and individual tax returns. Validating income and expenses is crucial for sole proprietors, partnerships, and corporations. Similarly, individuals, especially those who itemize deductions or have complex tax situations, must be able to substantiate their deductions.

During an audit, the IRS typically requests receipts as they are primary evidence to verify the expenses claimed on your tax return. Your receipts detail the amount you spent, the transaction date, and the nature of the expense. This information is essential for the IRS to confirm that the expenses you claimed on your return are legitimate and accurate.

If you claim business expenses, itemized deductions, or expenses related to the sale of a property, receipts are the most straightforward way to substantiate these claims. They help demonstrate that the deductions are valid and compliant with tax laws.

What Happens If You Get Audited and Do Not Have Receipts? 

Facing a tax audit without receipts might seem daunting, but many taxpayers encounter this situation. The process of an audit with receipts is straightforward: 

1. The IRS sends a letter
2. You provide your receipts and financial documents
3. The IRS verifies the numbers 

However, when receipts are missing, the audit takes a different course:

The IRS will send you a letter, which is their standard contact method. If you are concerned about the letter’s legitimacy, you can confirm the audit by calling the IRS directly.

Then, start gathering the information you do have. Review the numbers before submitting your records to the IRS to ensure they match your tax return.

If you don’t have receipts, you’ll need to invest additional time reconstructing your expenses, doing historical bookkeeping, or finding alternative forms of documentation. You also need to understand the Cohan Rule and methods for substantiating expenses.

The Cohan Rule

The Cohan Rule is a tax law provision that offers a lifeline to taxpayers undergoing an audit without receipts. It originated from a 1930 court case involving taxpayer George M. Cohan. 

During an IRS audit, Cohan admitted to estimating his expenses and lacking the receipts to back them up. He argued that his busy schedule prevented him from maintaining detailed records. The court sided with Cohan and ruled that, in the absence of receipts, taxpayers could still claim expenses if they were “reasonable and credible.”

Since then, the Cohan Rule has set a precedent allowing business owners to use alternative documentation to support their claimed expenses. However, the rule permits only the deduction of the minimum standard amount for a service or item, as determined by the IRS, without the receipt.

Also, the Cohan Rule does not mean you can claim any expense without proof. The IRS may still disallow certain deductions if your proof is insufficient. As a result, gathering and presenting as much credible information as possible to justify your expenses during an audit is crucial, even without specific receipts.

Substantiating Your Reported Expenses Without Receipts

If you claim expenses under the Cohan Rule, you must provide as much evidence as possible to substantiate your deductions. Here are some steps you can take:

• Gather alternative documentation: Collect any documents serving as evidence of your expenses, such as bank and credit card statements, canceled checks, and invoices. These documents should show the transaction’s date, amount, and nature.
• Use digital records: If you made transactions online or used electronic payment methods, look for email confirmations or digital receipts that corroborate your expenses.
• Reconstruct records: If certain records are missing, reconstruct them as accurately as possible. For example, you can ask vendors or service providers if they have copies of past invoices or statements.

By taking these steps, you can build a solid case to support your reported expenses, even without specific receipts. If you do not have receipts for an IRS audit, consult us at Seattle Legal Services, and take advantage of our professional audit preparation and representation solutions. 

IRS Fake Audit Receipts – Not an Option

Do not fabricate receipts or present fake documentation when facing an IRS audit. The consequences of submitting falsified or misleading information during an audit can be severe, including penalties, fines, and even criminal charges for tax fraud or evasion.

The IRS has sophisticated methods for detecting fraudulent activities, and any attempt to deceive the agency can lead to a more thorough examination of your tax affairs and legal repercussions. Always approach an audit with honesty and integrity, providing only legitimate and verifiable information.

If you do not have receipts or proper documentation for certain expenses, pursue legitimate avenues such as the Cohan Rule or other acceptable forms of substantiation. The focus should be gathering and presenting as much credible evidence as possible to support your claims.

Potential Outcomes of an IRS Audit Without Receipts

An IRS audit without receipts has several potential outcomes depending on the evidence you can provide and how well you can substantiate your claimed expenses. Here are some possible scenarios:

• No change: If you can provide sufficient alternative documentation and convincingly explain your expenses, the IRS may conclude that no adjustments are necessary. This best-case scenario indicates that your tax return was accurate as filed.
• Tax bill: If the IRS determines that you have underreported your income or overstated your deductions, the agency will send you a tax bill reflecting the increase in your liability. In the case of a substantial liability, you may need to consider tax relief. 
• Penalties and interest: Sometimes, the IRS may assess penalties for inaccuracies or negligence on your tax return. These penalties are in addition to any taxes and interest owed. The severity of the penalties can vary depending on the nature of the errors.
• Refund: If the audit reveals that you overpaid your taxes, it can result in a refund. This outcome is less likely when taxpayers do not have receipts but can occur if the review uncovers other errors in your favor.
• Criminal investigation: In extreme cases, if the IRS suspects fraudulent activity or willful evasion, it could refer the case for criminal investigation. If you suspect the IRS is pursuing civil or criminal penalties against you for tax fraud, contact us at Seattle Legal Services. 
• Agreement or Appeal: Once the audit is complete, you can either agree with the findings and make the necessary payments or file an appeal if you disagree with the results. The appeals process allows for further review and negotiation with the IRS.

Seek Expert Guidance for Your IRS Audit

Navigating an IRS audit without receipts can be a challenging experience, but it’s not insurmountable. By understanding your rights and gathering as much alternative documentation as possible, you can effectively substantiate your reported expenses and navigate the audit process. 

If you’re facing an audit and don’t have receipts, seek professional guidance to protect your interests and minimize your tax liability. 

Don’t go through the audit process alone. Contact Seattle Legal Services, for a consultation today. Our experienced team can help you prepare for the audit, provide legal advice, and represent you before the IRS.

Frequently Asked Questions

When does the IRS ask for receipts?

The IRS typically only requests receipts from taxpayers it is auditing. You do not need to provide receipts when filing your tax return. 

Does the IRS verify receipts during an audit?

During an audit, the IRS may verify your receipts to ensure that the expenses you claimed on your return are accurate and legitimate. The IRS may request original receipts, invoices, or other documentation to confirm the details of the transactions, such as the expense’s date, amount, and purpose. 

Can I use bank statements as receipts for taxes?

You can use bank statements as supporting documentation for tax purposes, but they may not always be a direct substitute for receipts. While bank statements can provide evidence of transactions, they typically don’t include detailed information about the nature of the expenses necessary to substantiate deductions.

What if I don’t have receipts for capital improvements?

Look for other records that can provide evidence of the improvements, such as bank statements, credit card statements, canceled checks, or loan documents that may indicate the amount spent on the improvements. If you hired contractors for the improvements, ask them for copies of any invoices, contracts, or statements detailing the work and the costs.

If you have additional questions about audits, contact us directly. At Damien’s Law, we offer audit representation, and we can also help you navigate paying for unexpected tax liabilities, tax prep for future years, and any other tax concerns you may have. To get help now, contact us today.