As an American citizen, you must pay taxes to the federal government and submit an honest account of expenses and deductions you make each year. In some cases, however, the IRS may conduct an audit against you either at random or under suspicion of illegitimate expenses. Regardless of why they decided to conduct an audit on you, however, it is important to get your documents in order to prevent harsh and costly penalties.
In the event that you do not have receipts for your expenses, it is strongly recommended that you contact an experienced tax lawyer. There are ways in which you can prove your deductions without receipts by showing bank statements and other reasonable and valid evidence. However, by hiring an experienced tax audit attorney you are less likely to be charged with tax fraud, receive tax penalties, or get moved into a higher bracket of tax.
Ronald Arthur Stearns Sr. PLLC in Houston, TX
Ronald Arthur Stearns Sr. PLLC has what it takes to ensure that you do not face penalties because of an IRS tax audit. Through his 26 years of practice, he has gained a deep understanding of tax law and the requirements of IRS audits. If you hire him as your attorney, he will fight hard to ensure that your rights as a taxpayer are protected and that you are not mistreated by the IRS.
He can assist you with getting records of your expenses and deductions, submit these to the IRS, help you with an appeal, set up a fair payment plan, and much more. His top priority is protecting the rights of Texas taxpayers and he can help you with any tax issue you face.
Call today to schedule a consultation with Ronald Arthur Stearns Sr. PLLC by calling 210-853-2135.
What is an Internal Revenue Service Audit?
Taxpayers have a responsibility to pay taxes annually on their income to the Internal Revenue Service (IRS). If they have work-related expenses, they must declare these expenses which can then offset some of their taxes. The IRS will, in some cases, conduct assessments of an individual’s or business’s income tax returns, as a way to assess whether the information they provided is legitimate. Usually, a tax audit takes place when the IRS uncovers information that seems questionable or unusual.
Typically, an IRS audit notice will arrive by mail within 7 months of first filing your tax returns, however, the IRS has up to 3 years to conduct an audit. In the letter, the IRS will specify the documentation that you need to provide, and you will usually have 30 days to submit this documentation.
If you do not have receipts for your business expenses, there are certain steps that you can take to reconstruct or replace these receipts. An experienced tax attorney can help you understand the process of what happens when you get audited by the IRS and do not have receipts.
Why Am I The Subject of a Tax Audit?
There are a number of reasons that you may be the subject of an IRS tax audit. The Internal Revenue Service conducts a certain number of random audits each year based on its own system. However, the majority of IRS audits are conducted based on certain triggers or ‘red flags’ that could make your tax return pop up in the system. In addition, IRS audits are more likely to occur on small business owners, self-employed taxpayers, or freelancers.
Some reasons you may be the subject of a tax audit include:
- You have an annual taxable income of more than $1 million
- Home office tax deductions
- Claiming a lot of charitable contributions
- Reporting a lot of losses
- Misclassifying your employees
- Claiming a lot of entertainment expenses
- Failing to submit or incorrectly filling out forms W-2 or 1099
- Large cash transactions
- Math mistakes on your tax returns
IRS agents are more likely to investigate a person who triggers multiple red flags. For example, they are likely to send a tax audit notice to a person who owns a small business, makes a lot of charitable donations, makes a lot of entertainment expense deductions, and does not earn a lot of money. However, a tax attorney can help you prove these expenses with or without receipts so that there are no repercussions from the IRS.
How To Handle a Tax Audit Without Receipts
Receiving a notification for an IRS audit in the mail can be quite worrying, particularly if you do not have receipts to prove all of your expenses. However, there are a number of ways in which you can prove that your business expenses and financial records are legitimate by using your credit card statements, invoices, and more.
1. Get a Letter From IRS Auditors
The first step in the IRS audit process is to receive an audit letter in the mail. When you receive an audit letter, it is important to ensure that the letter is legitimate. There are many cases of scammers sending out letters to business owners to try and get their bank account details. To verify your letter, you can call the IRS office or get your tax lawyer to do so.
2. Gather All Documentation That You Have
The next step in the audit process is to gather all documentation that you have related to your business expenses and financial records. With organized records, you will get a better idea of what documentation is missing from your audit that you need to prove using other methods.
3. Find Alternative Proof For Business Expenses
When you have missing or incomplete records, you will need to gather alternative proof to submit in an IRS audit. The system in place to help those with missing receipts prove their financial records is The Cohan Rule, which was established by the tax court in 1930. The way in which a person can prove their expenses using this rule is by showing bank account statements, photographs of records, emails, and more.
4. Give This Proof To The IRS
Once you have gathered alternative proof for your business expenses, you must then send this information on to the Internal Revenue Service. It is important to have all information organized before sending it and ensure to include documentation for areas that they specifically addressed concern for. If you need to meet an IRS agent in person, you will be able to explain the missing receipts and provide alternative proof. An experienced tax lawyer can help you gather information and submit it to the IRS.
5. Answer Questions
Once you submit the evidence, the IRS auditors may come back with further questions on your expenses. They may require further explanation for a particular expense or in relation to credit statements. It is important to respond to them as soon as possible to maintain a good level of communication.
6. Receive IRS Audit Findings
Once the tax audit is complete, you should receive the findings within 30 days. The finding may show that you owe a certain amount of money due to disallowed deductions or that everything checks out.
7. Appeal the IRS Audit Ruling or Pay the Amount Owed
Depending on the result of the audit, you may want to appeal the decision or pay the amount you owe. A tax lawyer can help you assess whether there are valid grounds to appeal the decision.
The Cohan Rule Explained
As noted briefly before, the Cohan Rule was a 1930 tax court decision that made it easier for those without receipts to claim tax deductions. In this case, Cohan argued that he was too busy to keep receipts and records for his claimed expenses, including business, entertainment, and personal expenses. However, the IRS tried to disallow the claimed deductions.
The tax court found that if a taxpayer does not have receipts they can still claim expenses so long as they are credible and reasonable. The court also found that a person can deduct the minimum standard calculation for something purchased without receipts. This means that if you can prove your personal, travel, entertainment, and business expenses using other reasonable methods, your expense deductions will be legitimate.
Some credible and reasonable methods include:
- Credit card statements, bank statements, and canceled checks. These documents can help prove an expense or donation to an organization.
- Invoices and receipts. If you can get receipts and invoices from your suppliers and business partners, this can help prove what you spent your money on.
- If you have a business calendar or appointment book, it may help you prove the number of clients you have, the dates on which you had meetings with them, and any business purchases.
- Emails can be used as proof for meetings, arrangements, travel expenses, and more. If you have old emails with former clients or a business partner, you can put these forward as proof of a business expense.
- Social media history and smart location data can also be used as a tool to prove business expenses without receipts. You may be able to demonstrate that you traveled to a certain place for a meeting or arranged a business deal over Facebook, for example.
- Photographic evidence of bills and receipts can also be used if you do not have paper or digital receipts.
It is important to try and gather as much information as possible to prove your business expenses during an IRS audit. The more information you can provide for a business expense, for example, a travel expense to a meeting out of state, the more likely they will consider it to be legitimate. An experienced tax lawyer can help you gather documentation for your tax audit that is reasonable and valid.
What Happens After an Audit?
Depending on the evidence you supply to the IRS and whether they are satisfied that your documentation is for legitimate expenses, they will issue a finding. In some cases, they may be completely satisfied with the evidence you provide and decide that everything is legitimate and reasonable. However, in other situations, you could be issued with a new tax bill, meaning you will have to pay back what you owe, and also potentially a fee for getting it wrong in the first place.
If you are presented with a new tax bill, you run the risk of also being put in a higher tax bracket, which means you will have to pay higher taxes in the future. As such, you may want to think about whether paying the new bill is the best decision for your case. Some options you may have include:
- Requesting a delay
- Paying the taxes and being accepted to a new tax bracket
- Set up a payment plan
- Appeal the decision and fight against the ruling
If you decide to appeal against the Internal Revenue Service, you will need to have an experienced tax audit lawyer by your side. A lawyer can advise you on tax law, help you organize your documentation in a way that proves your expenses are legit and fight against the IRS audit findings.
What Happens If You Get Audited and Don’t Have Receipts?
Receiving a letter in the mail from the IRS can be a scary experience, particularly when it relates to a tax audit. Although we try to keep documentation of all expenses we make throughout the year, nobody is perfect, and you may not have all of the receipts necessary when the IRS mails you for an audit.
However, it is possible to prove all expenses relating to your business and personal life with alternative evidence, such as bank statements, photographic evidence, emails, and more, as per the Cohan Rule. This may seem like quite an overwhelming task, and in some cases, the IRS can be quite strict on the evidence you provide them.
As such, we recommend hiring a tax lawyer that has significant experience with tax audits and that can help guide you through the process. Ronald Arthur Stearns Sr. PLLC has been helping the citizens of Texas with tax audits for over 26 years. He has a deep understanding of the audit system and how the IRS works. As such, he can help relieve the stress you feel and do everything to ensure that you do not face penalties for lack of documentation.
He can help you gather your financial documents, organize them in a way that proves your expenses are valid, submit your audit to the IRS, carry out an appeal if necessary, and fight to protect your rights. He has built up a strong attorney-client relationship due to his dedication and hard work, and he wants to help you in any way possible.