When it comes to striking fear in the hearts of millions of people, few are as powerful as the IRS. Just hearing the word “audit” can send many of us into a frenzy looking for receipts to prove our expenses. However, what if I told you that you could survive an IRS audit without receipts? Some bookkeepers and other experts claim it’s impossible, that not having your receipts is catastrophic, and while it’s not the best position to be in, it is doable. So today here are three different things you can provide to help you in an audit if you don’t have receipts.
For those of us who are new to business, or new to taxes, you may not be aware of what an audit is. First, you will receive a letter from the IRS stating that you will be audited. The IRS will never call you or show up at your home or office. It will always start with a letter. Several different types of audits can happen, but we won’t get into that today, just know that for some reason or another the IRS is looking for documents to prove your claims.
As I mentioned earlier, most bookkeepers and accounting professionals will urge you to keep your receipts. This is in no way wrong, and keeping receipts is your best option when it comes to protecting yourself from disallowed expenses. However, there are several other ways that you can survive your IRS audit without receipts. Here are three common ones:
1) Logs or Diaries – a log or a diary is a book or other place where you write down the individual transactions. These logs might show the IRS the dates and locations of travel, as well as the connected business purpose and mileage. A log might also show gambling winnings and losses, as well as dates and locations that these winnings or losses took place. You could also prove job-hunting, or client sourcing activity and expenses as well.
2) Cohan Rule – This law comes from a famous court case Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), that basically says that the IRS must allow a portion of your deduction even without proof. However, this is a long shot. They are not required to honor your full expenses, and may only allow you to deduct the least amount you could have spent. You may even have to appear in court. If your back is to the wall, this is maybe the last hail mary in your playbook and can work well for expenses under $75.
3) Theft or loss documents – If someone were to break into your home and steal, oh I don’t know, all of your tax receipts from the last two years, you could be in a world of trouble. Although this situation isn’t very likely (unless they were also being audited, of course). The more likely situation can be a fire or computer crash. In these cases, a police report, insurance report, or photos and video of the damage could be proof enough to help you get through your audit even though you no longer have the receipts to back up your deductions.
So that is information on what an audit is, and how to survive it without receipts. These alternative methods are much more time consuming and unreliable then using accounting or expense tracking software. With Neat you can easily snap a picture of the receipt and let us do the rest of the work for you. The best way to survive an audit is to be prepared. With a 30-day trial, you can start getting yourself prepared today for free! You never know whether you will get audited or not, but if you have organized records, you’ll never have to worry if that day does come.