IRS audits – how can you prove expenses without receipts?

Posted on November 9, 2009
Filed Under Audits | 1 Comment

Can you prove expenses in an IRS audit without receipts and checks? 

Thanks to the tax case of Cohan v. Commissioner,39 F. 2d 540 (2d Cir. 1930), the IRS will allow expenses even if receipts and checks are missing.

All you need is a reasonable basis to recreate the expense and credible testimony that you actually spent the money.

The Cohan case is law, and is followed by the IRS and the U.S. Tax Court.

Examples of using the Cohan rule:

A mileage log can be recreated if the basis for it is reasaonable – a calendar, for example, showing appointments.  Ever hear of a realtor who sells houses without travel?  A reasonable basis exists for the expense.  A realtor would make a log book from a review of her calendar showing open houses, supplemented by an affidavit providing an overview of how business is conducted. 

For a flooring contractor to his subs, for example – labor expenses can be proven by recreating the jobs performed and the manpower used.  Carpet and flooring does not get laid by itself – a statement as to how the business was conducted supports the expenses.  No reciepts, but there is a basis to recreate and prove the expense.

In many cases, your testimony is valuable support for the reconstructed evidence.  In IRS audits, your testimony can be given in the form of an affidavit (a sworn written statement) of facts reciting how you paid the money.

Audit Reconsideration for missing records.

If your audit has already been completed and you are looking at a bill that is too high, the audit can be reopened to allow you to recreate expenses.  This is called audit reconsideration.

The Cohan rule, as it is known, is almost 70 years old, but it has withstood the test of time.  The decision still stands - direct records are not needed to verify an IRS expense deduction.  If you can reconstruct the evidence, you can use that to make an reasonable estimate for the deduction.

You are not a professional record-keeper.  Fortunately, thanks to the Cohan rule, you can overcome holes in your recordkeeping.

Comments

One Response to “IRS audits – how can you prove expenses without receipts?”

  1. howardlevy on November 10th, 2009 8:22 am

    Hi Matt:

    You are generally correct as to auditors, but the story changes significantly in appeals, and more so if a Tax Court petition is filed. Cohan is not always followed by auditors, but it is by Appeals Officers and in Tax Court.

    I have solved multiple audits with Cohan very effectively this way – bottom line is if the expense is real and the taxpayer can credibly recreate it and testify to it, IRS will become reasonable in allowing the expense.

    You know I always advocate better results outside of audit by being patient and going to appeals/Tax Court.

    Howard

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