The IRS questions around 6 million tax returns each year, through an audit or by a verification notice. WARNING: The IRS is not your friend or advocate–they are looking to fine you, increase what you owe them, or worse–much worse.
If you must prove items you have reported on your tax return, you may encounter obstacles in the process; especially if you failed to retain your receipts, statements or other records.
We always recommend that you get a tax professional to talk to the IRS for you. If a professional representative mistakenly says something that the IRS later disputes, the IRS will not be able to accuse you of lying–which is a felony.
Case #1 — What if you don’t have all the information to prove items on your return? Example: You deducted medical expenses, but when asked for proof, you no longer have receipts or even the list of medical providers, prescriptions, and other medical costs. Answer: You can retrace your steps. Determine your medical expenses for the year, and get receipts from doctors and pharmacies. Your bank statements and cancelled checks are a good starting point, if you still have access to these documents.
Case #2 — You operate a business that deducted office expenses and now you can’t find your receipts. The truth is, it may be logical that you would have expenses that the IRS should allow, even though you don’t have a receipt. The tax courts have provided some flexibility for this circumstance (the Cohan Rule), understanding that in the real world, a business must have overhead to operate and conduct its business. Therefore, the IRS provides some flexibility and can take your word that you had these expenses.
Items You Probably Can’t Recreate
The law requires some expenses to be documented at the same time the expense occurs, like:
- Travel and entertainment expenses: These expenses are required to be recorded by receipts made at the time the expense is incurred.
- Charitable contributions: All charitable contributions need receipts that accurately reflect the value of the contribution.
- Mileage records: You must record the mileage, date, place, and business purpose.
- Gambling losses: You must have receipts, tickets, statements and documentation like a diary or similar record of your losses and winnings.
If you don’t have these records, the IRS can disallow your deduction. As a practical matter, IRS auditors may allow some reconstruction of these expenses, under “reasonable” circumstances. Ask Elite Tax Services about handling an IRS audit.
Reconstructing Records for the IRS
First — at Elite Tax Services we always recommend to our clients that they set up a credit card that they use strictly for business related expenses. That way, they will always have easy access to documentation of each expense.
If the IRS demands that you provide records that you don’t currently possess, it’s important that you immediately begin to reconstruct the items they are looking for. It can take a while to put the records together, so start right away so you can meet the IRS deadline. The IRS is not known for its patience or compassion.
You may need to reconstruct your records, or simply provide a valid explanation of a deduction instead of the original receipts to support the expense. If the IRS disagrees with your proof or explanation, you can appeal the decision. You may also have to argue against penalties during the audit by providing facts about how you made your best effort to comply.
Lack of Records Often Leads to a 20% IRS ‘Negligence Penalty’
Tips to reconstruct your records:
- Obtain and review bank account and credit card statements. They are often a good list of what you paid. They may also be a good substitute if you don’t have receipts.
- Vendors and suppliers may have duplicate records. Reach out to them if you need a copy.
- Appointment books can provide back-up information about travel, the number of clients, and frequency of service.
- Cell phone records can help establish dates of service or assist in reconstructing expenses.
- You may be able to reconstruct mileage estimates with online map tools. You can’t just estimate miles per week x 52 = miles to deduct. Consider periods of no travel, or extra travel.
If you reconstruct or estimate expenses in a way other than what the IRS requires, create a declaration, and sign it under penalty of perjury.
Use a Tax Professional
Filing your taxes properly is difficult. Dealing with IRS tax problems can be devastating. Tax professionals can help when you can’t get access to all the records the IRS may be asking for, and can shield you from criminal liability for lying to the IRS, as long as you’re honest with your tax pro.
An experienced tax professional knows your options, as well as the likelihood of an IRS agent accepting your reconstruction of documentation. She can also get you back on track and get your record-keeping back into shape.
We’re Here to Help
Elite Tax Services — We care, and are BIG enough to meet all your needs, yet small enough to know your name.