Audits are always scary. It’s involuntarily allowing someone to invade your personal space and if they find something missing or something they don’t like, you are charged with penalties. Stepping out of the philosophical boundaries, in this blog piece, we will talk about the different kinds of tax audits, how to prepare oneself and your business for one, the importance of record-keeping/receipts, and what to do when you are being audited by the IRS and have no receipts. Starting from the very obvious, let’s begin by defining what tax audits really are.
What Is A Tax Audit?
A tax audit can be defined as a scrutiny process conducted by the Internal Revenue Service (IRS) to look at your tax returns a bit more closely and confirm that the income and you are earning and the deductions made on it are accurate. Taxpayers are only selected for an audit if something seems out of the ordinary. Meaning if you are suspected of earning more income from other sources but are being taxed for only the one IRS knows of, you may be their next target, which is why being audited by IRS and having no receipts can be even scarier.
There are three different types of tax audits based on the level of their importance. A taxpayer may be audited in more than one ways simultaneously, depending on the echelon of suspicion. All three types have been described briefly below:
The first of the three kinds, mail audits are received by nearly all taxpayers whose incomes and deductions are in doubt. This is IRS’s first step to inform the taxpayer that his returns may be in question and therefore, he must prepare for any further examination the IRS deems necessary. Typically, in this type of audit, there is no need for any in-person interaction. All the IRS wants is additional evidence to validate some items you reported on your tax return.
For instance, if you mentioned that you donated $1,000 to charity, IRS may want to see the proof it. This is one reason why keeping all tax receipts safe is important. They may be the only piece of paper that saves you from further questioning and scrutiny.
Conducted at a local IRS agency, this type of tax audit is conducted as one-on-one interaction. These are slightly more in-depth and thorough than mail audits and the person in question may have to answer any queries or questions the person in authority asks. These questions include information about your returns and taxpayers may also be asked to back their claims with receipts and bank statements. If you are being audited by the IRS and have no receipts, there is no need to panic. You can consider professional help from your tax law as it is acceptable by the IRS if you bring one along to official meetings as your representative.
This type of tax audit is the broadest kind. In this type of audit conducted by the IRS, a representative from the agency will collect information from your office, home or business. These kinds of audits are usually conducted from taxpayers who are being questioned for more than a few deductions. These kinds of tax audits can be really intensive and may cover many items on your tax returns.
How Can Taxpayers Avoid Tax Audits?
If you wish to avoid being audited by IRS and have no receipts, there are a few things you can do to save yourself from the stress that comes along with it. The reason why most people are being audited by the IRS and have no receipts is that they often overlook the importance of these simple steps and end up being in a much more complex situation. The ways described below are quite straightforward and only require some thoroughness on the taxpayer’s part.
1. Check, double-check, triple-check:
The very basic strategy to avoid being audited by IRS and have no receipts is to make sure all the returns you mentioned in your tax report are accurate to the last digit. Also, ensure that you have your correct address, personal information, social security pin number and contact information, etc. on the report. There is no harm in rechecking a couple of times before filing them.
2. Keep records:
Being audited by IRS and having no receipts is nothing short of a nightmare, which is why the ultimate stress is on making sure that you have all the receipts and records. These receipts and records are the evidence for your deductions so ensure that you have the accurate and organized.
3. Lower your expenses:
Another great way you can avoid being audited by the IRS and have no receipts is by reducing your entertainment, food, and car expenses. These expenses are usually the ones that raise red flags because most of the time, these aren’t business expenses but rather personal. However, if you plan to report them as business expenses, make sure you have proper documentation to support your claim.
How to Prepare Yourself for a Tax Audit
The last thing any of us want is to see in our mail, a brown envelope with the return address of IRS, marked “Official Government Business”.
Some may have a panic attack just thinking about the oncoming stress, being questioned and demanded to offer proof when they don’t have one. But all that you need to do is take a long breath and relax. It may not be as bad as you think.
If you are wondering that there is no way you can avoid being audited by IRS and have no receipts, then you must start considering preparing yourself for the pressurizing torture. Start gathering information in the form of receipts, spreadsheets, documentation, etc., and ensure that you have proof of all the records you mentioned in your tax report when filing for returns. Other than that, there are some other great ways to avoid being audited by the IRS and have no receipts. These include:
Get professional help:
You may be kidding yourself if you don’t take the severity of the situation seriously. Tax audits can turn really intensive and long if the agency is unable to find what they have been looking for. Your best bet is to take up professional help. CPAs, tax attorneys, or enrolled agents may better represent you in an audit because you may not have the skills or knowledge about the complexities of taxes and audits, but they surely do. A trained help on your part may better your chances of avoiding being audited by IRS and have no receipts in the future since they are taught law for many years. To a layman, reading tax codes may seem like trying to understand a foreign language. Enrolled agents, however, have been through some grueling training in their specific areas which makes them better candidates to represent you.
Keep good records:
Nothing can alleviate more stress when you are able to put your finger on the document the IRS has been demanding. You have to ensure that you have organized records of both primary and secondary receipts if you wish to avoid being audited by IRS and have no receipts. Primary receipts account for all those bills and expenses that you incurred, whereas secondary records include spreadsheets summary information or mileage logs you kept. But how old receipts must be kept and may be requested by the IRS? As a business owner, you must have records of the past three years plus the current one.
Keep the information gathered:
If you haven’t already gathered all the receipts for the audit year in question, now may be the time. Try your best to recreate them or ask for duplicates if you have lost the original ones already. These could be about your last year’s medical emergency or business-related expenses. When going for the audit, make sure to take all these documents along to support your case.
If you are under consideration for a tax audit, the agency will set up a time and date for the audit. Don’t make any excuses unless you really have something more important to attend to. Always be professional as you don’t want to turn their suspicions into reality. If you don’t make yourself available for the set time and date, they may think you are trying to run away from paying your taxes in full. Also, make sure to wear the right attire when you are appearing in front of the agency – you want to be taken seriously.
Don’t try to act too friendly:
If you want to stay clear of being audited by IRS and have no receipts, don’t try to act too friendly with the tax auditor and start offering extra information. As a taxpayer, you must remember, he is not a friend and he probably pays all his/her taxes in full on time. Consider yourself in a trial. You are being audited for a reason. Don’t offer voluntary information unless you are being told. Don’t answer any questions that you may find not related to your returns.
What to do if I am being audited by IRS and have no receipts?
Fear not, the Cohan Rule can save you. But what is a Cohan rule and will I be eligible for it?
Named after the famous Broadway star who gave the world “Give My Regards to Broadway”, George M. Cohan in the 1900s was audited and told that he will not be allowed to claim deductions on the expenses he wasn’t able to show proof of. It was wrong of him to not keep the receipts but he still appealed this ruling that even though he didn’t have the official receipts to prove it, he did incur the expenses and therefore must be given a fair trial. Luckily the courts sided with him which forced the IRS to accept all his estimates of the expenses. Today, the same rule allows many business owners to deduct a few of their business-related expenses even when they have no receipts to show that they were incurred.
However, the IRS isn’t a fool to allow anyone to use the law for their own benefit. There is of course a catch. Taxpayers will only be allowed to deduct some of their business-related expenses if they are able to show some oral, written, or supportive documentation, if not the original receipt. This will serve as a foundation on whose basis a reasonable approximation has been made.
According to the rule, the IRS allows business owners to deduct their expenses that were incurred to run the business and whose receipts can’t, aren’t, or weren’t documented. If you provide sufficient credible evidence, the IRS will have no choice but to deduct those expenses from your tax returns.
The Importance of Keeping Receipts
There can be nothing more frightening than being audited by the IRS and having no receipts. All businesses, whether big or small need to have their records straight. Bookkeeping is as essential to any business as an organizational plan. Even when you have the best business model, human resource, and loyal clients, if you don’t have a bookkeeper, you may soon become the next victim of the IRS as the tax rules in the states are getting more conservative with every passing day. Retention of receipts is an important part of this process. Under this heading, we will try to establish the reasons as to why bookkeeping is important for any business type and ultimately help you avoid being audited by IRS while having no receipts.
- Monitor the growth of your business: A great reason to keep past records organized is that it allows you to see how far you have come. It helps you to monitor your growth since its birth and also gives you an idea of the changes in order to make your business prosper. In order to further grow, you need to know where you started from and what your current standing is.
- Organize tax returns: Organized bookkeeping helps in recreating the tax picture of the year that went by. Well-managed receipts will help you reconstruct the same picture for this year too with the best legally possible returns.
- Prepare financial Statements: You need to have your receipts in order if you wish to make a profit and loss balance sheet statement of your business.
- Monitor deductible expenses: Many times, doing business gets really difficult. You end up overlooking many deductions you may have claimed, but if you had the receipts, that might not have happened.
- Categorize the source: When you have proper receipts, you can better separate the taxable income from the nontaxable and understand your true deductions.
How to keep your receipts safe?
Lastly, if in the future you wish to avoid being audited by IRS and have no receipts, here are some handy tips we are leaving you with to ensure that you don’t get audited in the near future.
Take notes on receipts regarding their purpose:
It is not as difficult to recall expenses paid incurred on machinery and office equipment, but the money spent on fancy dining and entertainment expenses with office workers, especially if the IRS wants to know who you dined with three years ago and why that was counted a business-related expense. Therefore for your own good, make notes of all your expenses and for what purposes were they incurred.
Have receipts of the past six years scanned and saved electronically:
It is always a good idea to keep all your documentation and receipts electronically saved on your hard drive. Who wants to read from a faded receipt the digits of the amount spent on a certain item?
Maintain a business journal:
Another great way to avoid being audited by the IRS and having no receipts is by keeping a daily journal/ledger. This may sound old-school, but this might be the only thing that stands between you and the IRS. By just recording your details of the day, things you sold, used, and spent on can be really rewarding. When running a business, by practicing these measures, you can actually save yourself from any sort of audits. There have been cases when the IRS asked business owners for copies of their Outlook and Google calendar to track all their spending and expenses.
Always have details of where you spent your money:
It won’t be sufficient if the only receipt you have to show to the IRS is of visiting a place and spending $5,000. IRS wants detail of where the money was spent. Was it spent on some technical, electronic gadgets or stationery for your business, or were they spent on a luxury vacation with family in a local resort. You need to be accurate if you want to avoid being audited by the IRS and have no receipts. They won’t buy it no matter how much you claim if you have no proof to back up your claim.
Don’t pay with cash for expenses:
If you want to stay clear of being audited by IRS and have no receipts, make sure you are not spending too much cash on your expenses. It can be an absolute death-nail for clients as the receipt are hard to keep and almost impossible to document. Cash is easy to spend, hard to track and reconcile with receipts. If you want to keep track of your spending, make sure to use your credit and debit cards as it is easier to keep their receipts organized.
Now that we have understood why it is so important to have all the documentation, bank statements, and receipts, all taxpayers must ensure they have their receipts fully organized, scanned, and saved electronically to avoid being audited by IRS while having no receipts.