When a taxpayer is audited, the Internal Revenue Service (IRS) typically asks for documentation related to the tax returns in question. This documentation often includes receipts for business expenses, charity donations, and other types of deductions. Providing these receipts can sometimes be enough to resolve the dispute, but what happens if you get audited and don’t have receipts? While the situation is not ideal, an experienced tax attorney can help you determine how to best proceed. If you have recently been audited and have questions about receipts or another matter, you can learn more by contacting the team of experienced Mississippi tax attorneys at Damiens Law at (601) 957-9672.
Receipts and the IRS burden of proof
According to the Internal Revenue Service, taxpayers have a burden of proof for entries, deductions, and statements made on their tax returns. This means each taxpayer is responsible for proving these elements of their tax returns. Expenses cannot simply be claimed, there must be documentation to back up the purchases and the amount claimed for deductions. Any taxpayer who claims deductions should keep thorough records to prove their expenses, such as receipts, bills, canceled checks, and other documents. The IRS requests additional evidence for travel expenses, gifts, auto expenses, and entertainment.
What kind of business records can the IRS request in an audit?
Recordkeeping is essential for business owners and the specific types of records that should be kept vary depending on the type of business. But in general, businesses should have recordkeeping systems that encompass all of their business transactions. These summaries can be kept in business books (such as ledgers and accounting journals) and books should show gross income, deductions, and credits. The Internal Revenue Service may request several types of supporting business documents during an audit.
Gross receipts include all of the income that a business receives. The IRS may request supporting documents to prove the sources and amounts of a business’s gross receipts. Documents in this category include:
- Receipt books
- Deposit information (cash and credit sales)
- Cash register tapes
- 1099-MISC forms
Purchases include all items that a business buys and then resells to customers. For manufacturers and producers, the cost of all raw materials and manufacturing marts are considered purchases. Supporting documents for purchases should identify who paid for the purchases, how much they paid, proof of payments, the date of payments, and a description of each item to establish that the payment amount listed was used for purchases.
Documents that may be requested for purchases include:
- Credit card receipts and statements
- Canceled checks or other documents that provide proof of payment
- Cash register tape receipts
The IRS may request a combination of supporting documents to prove all elements of a purchase.
Expenses include all costs (outside of purchases) that are necessary to the operations of the business. The IRS wants supporting documents for expenses to identify the payee, the payment amount, payment proof, payment date, and descriptions of each item to establish that they were used for business purposes.
The IRS may request the following documents for business expenses:
- Account statements
- Canceled checks or other documents that show proof of payment
- Cash register tape receipts
- Credit card receipts and statements
Travel, transportation, entertainment, and gift expenses
Businesses that deduct expenses for travel, entertainment, gifts, or transportation must substantiate specific elements of these expenses by providing receipts and other documentation.
Assets include all property that the business owns and uses in the course of business operations, such as office furniture or machinery. The IRS wants business owners to keep records that verify specific information related to business assets. These records are also used to calculate the property’s annual depreciation, along with the losses or gains when these assets are sold. The IRS may request documents like invoices for sales and purchases, real estate closing statements, and canceled checks to verify the assets of a business.
Documents that are used for assets should include the following information:
- When and how the assets were acquired
- Purchase prices
- Costs for any improvements
- Whether a Section 179 deduction was taken
- Depreciation deductions
- Casualty loss deductions (such as losses caused by natural disasters)
- How the asset was used in business
- When and how the asset was disposed of
- Selling prices
- Expenses of sale
Employment tax records
The IRS asks business owners to keep all employment tax records for at least four years after filing the 4th quarter of the year and may request these records for review. Employment tax records should include:
- Employer identification number (EIN)
- Dates and amounts for all wage, pension, and annuity payments
- Tips employees have reported to the business
- Records for allocated tips
- Fair market value of all wages
- Names, occupations, social security numbers, and addresses of all employees and recipients
- Employee tax documents that were returned for being undeliverable
- Employment dates for all employees
- Records for times when employees and recipients were paid while not working (such as sick days or time off due to injuries) and the amount of these payments
- Copies of income tax withholding certificates for employees and recipients
- Tax deposit records, including amounts and dates
- Copies of filed returns
- Records for employee reimbursements for fringe benefits and expenses
- Documentation for all credits claimed
- Documents to prove the amount of employee or employer shares of social security taxes that were deferred and later paid for in 2020.
Can business expenses be claimed without receipts?
While it may be stressful to wonder what happens if you get audited and don’t have receipts, in some situations it may be possible to claim business expenses without receipts. A special Internal Revenue Service provision called the Cohan Rule allows taxpayers to claim deductions for business expenses without receipts, as long as they provide accurate estimates of those expenses. This rule can be useful for some taxpayers who are audited without receipts, but its application is limited to taxpayers with certain circumstances.
The Cohan Rule is most commonly applied during audits, as there is no requirement to submit receipts with a tax return. But when an audit does happen, the taxpayer can rely on the Cohan Rule to substantiate estimates for allowable business deductions. The taxpayer must show that they incurred a valid business expense but cannot provide adequate documentation for the exact amount. If the taxpayer meets that requirement, they may claim a deduction for an amount deemed reasonable by the IRS or court.
In most applications of the Cohan Rule, the taxpayer will need to provide other records to prove the expense, such as books from their business. However, the Cohan Rule may be applied at the discretion of the IRS and there are scenarios in which it may be used based on reasonable assumptions to support the claimed expenses. There are even some situations in which the IRS may allow an unverified claim.
How can you document business expenses without receipts?
If a business is being audited by the IRS and does not have receipts, there are other ways to provide documentation that meets the requirements of the Cohan Rule. While this process can be intensive and time-consuming, providing sufficient documentation can help resolve an audit and minimize penalties and interest. Some ways that business owners can document their expenses without audits include:
- Contact suppliers and service providers – These third parties may have invoices and receipts of their own, which they can provide to a business owner upon request.
- Review financial records – Bank account statements, credit card statements, and canceled checks all can provide a record of payment dates, amounts, and recipients.
- Review the business calendar – A business calendar may contain information related to business travel or meetings, along with a record of meetings with vendors and service providers.
- Look for email receipts – Search through emails for communications with other businesses, which may contain email copies of receipts.
Receipts for capital improvements
In some audits, the IRS may request capital improvement receipts if the taxpayer claims a deduction for permanent structural alterations or repairs to a real estate property. To qualify for the deduction, the alterations must increase the value of the property. The IRS draws a distinction between capital improvements and repair expenses, and only capital improvements are tax deductible. The IRS has identified the following home expenses as capital improvements:
- Fixing home design flaws and defects
- Creating expansions, additions, or physical enlargements
- Increasing home capacity, productivity, or efficiency
- Changes with a medical purpose, such as adding a wheelchair ramp to the home
- Alterations made after the property’s economic useful life
- Replacement of major components or structural parts
- Property adaptations to new or different uses
Taxpayers who do not have receipts for capital improvements after being audited by the IRS should consider discussing their options with an experienced tax attorney.
Contact our Mississippi tax attorneys to learn more
If you are wondering what happens if you get audited and don’t have receipts, Damiens Law’s team of experienced Mississippi tax attorneys is here to help. We can evaluate your unique tax situation and formulate a strategy for resolving the audit. Contact Damiens Law today at Mississippi (601) 957-9672 to learn more about your legal options after being audited by the IRS.