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A Guide to Being Audited Without Receipts

The IRS questions around 6 million taxpayers annually either via audit or by a verification notice.

Most people panic because their record keeping skills aren't up to par to the standards of the IRS. So what does one do in this situation? Don’t panic and hire a tax professional such as an enrolled agent to work directly with the IRS. Doing so might save you thousands of dollars in the long run.

A professional will also work with you to only provide the information that the IRS needs.

One huge deduction target that is always scrutinized is the category of medical expenses. These things usually plague individuals with mounds of bills due to treatment plans. Treatment plans included bills from providers, prescriptions, tests, and other associated costs.

Need to acquire this info? Retrace your steps and get receipts from doctors and pharmacies. Also, look at your bank statements.

Businesses also have allowable deductions, all of which require receipts. However, there is the Cohan Rule which gives you some flexibility on your allowable expenses.

What you can't recreate and has to be well documented at the instance

  1. Travel and entertainment.

  2. Charitable Contributions must have specific value

  3. Mileage records. YOU are required to record the mileage, date, place, and business purpose.

  4. Gambling - this one is tricky because you have to have the receipts, tickets, statements and documentation. A diary form is probably the easiest approach for winnings and loss.

These four items without documentation may get the IRS to disallow your deduction.

The IRS will give you a deadline and procrastination will get you nowhere. Start the reconstruction process immediately or prepare a valid explanation of a deduction. The IRS may disagree and you can appeal. Also you may be subject to penalties of 20 percent due to negligence.

How to Reconstruct

  • Bank statements and Credit Cards are great records

  • Vendors and Suppliers may have duplicate records

  • Appointment and calendar books may work well.

  • Cell Phone records can help with location of the events

  • Mileage can also be done with online mapping tools. Don’t estimate because we all have periods of no travel.

Working with a tax pro helps a lot in this instance because they have dealt with these situations frequently and can help with the forensics needed. They will prepare a declaration, and you can sign it under the penalty of perjury.

If filing taxes is a difficult process for you, then hiring a tax professional may be a better option. Professionals also know the data and can gauge the likelihood of the reconstruction being accepted.

Also, they can get you restructured in organization and institute a record keeping process to prevent this from ever happening again.

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