What Happens if You Get Audited and Don't Have Receipts?
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| What Happens if You Get Audited and Don't Have Receipts? |
The consequence of when a taxpayer is audited without retaining receipts of subject, controversy, or contention. This is particularly true when the receipts may be essential for the person to show the receipt of exactly that which was claimed or for which the deduction was claimed within a given taxable year.
Logically, such a person would be reduced to showing that, which would be a secondary piece of evidence, thus substantially reducing their chances of either defending or receiving an expense that would otherwise be deductible.
One document that is commonly requested as part of an individual tax audit for both businesses and individuals are receipts. Receipts are the itemized slip factored by a given purchased item or items and indicate the item and the price that was paid for their purchase.
Since receipts are essential when questioned in the event of an IRS tax audit, in many instances, individuals or business owners lose their original receipts. They have the option of still substantiating their claimed expense.
Purpose of Audits in Taxation
Tax audits are the most important mechanism that tax administrators have to counteract tax evasion and are the instruments used to ensure compliance with the tax obligations of individuals.
The IRS audit process must be based on an efficient analysis and evaluation of taxpayer information, with selected audits focused on the detection of evasion.
The objective of these audits is to develop a tax system in which the majority of citizens voluntarily comply with their tax obligations in a climate of equity, legal security, and proportionality, and in which deterrent measures are applied to those citizens that do not comply with their tax obligations.
What happens if you get audited and don't keep your receipts?
Over the course of the year, business owners of all kinds collect receipts for their expenses, which will serve as proof of expenses, so they can take advantage of the tax deductions those expenses represent.
Once they've turned them in to their tax preparers, the boxes of receipts are often tossed out in favor of consolidating the paperwork into 1099s, W-2s, and other highlighting papers.
Lots of business owners will wonder what they should do with all those receipts, and the answer is simple: Keep them. Keep them for as long as the IRS will audit you. Then, when that period is past, you guessed it, throw them out.
The general rule says documents should be kept for three years after the filing date, but there are a few exceptions that require keeping them a little longer, such as income taxes that should be retained for six years.
Documents related to real estate should be kept until the property is sold or disposed of, plus six years.
However, just because a tax return has been filed doesn't mean the work is over. Yes, the business might be able to toss the receipts related to that documentation, but the tax return itself should be kept for three years after the filing date.
The business also has to be able to prove to the IRS that it has a legal right to all the deductions that it authorizes. After the business owner has submitted the requests but the copies have not been returned, businesses often wonder how much difference it makes.
The answer is a big one. If the IRS takes a look at the records of deductions and sees they don't have one, the tax preparer will tell them about the loss of important information. An uninvited audit might be the first thing businesses know about the missing information.
If the IRS tries to conduct an audit on a taxpayer who doesn't have the proof, they can charge a penalty for the missing information or even disallow your tax deductions, which will make you pay more taxes. That's because they can assume the most disadvantaged part of the taxpayer's generosity.
What to do when being audited by the IRS and no receipts are available
Regardless of whether they have information of merit or control, everyone has receipts for their adjustments.
In the event you find yourself in the predicament where the IRS comes knocking at your door and advises you that you are being audited and you need to provide them with documentation for adjustments that you may have made on the tax return, and you don't have them for your records, you will have to do some rapid scavenging to locate something.
In the event that the audit has already been scheduled, you should request that the auditor reschedule the date so you can have some more time to conduct this scavenging.
You will need to contact the entities that have tax documents that you may not have and request the documentation. Be honest; you are being scrutinized by the IRS, and these third parties can provide the IRS with the information.
What if I don’t have receipts to prove deductions for capital improvements?
What can be done if the taxpayer makes real, documented capital improvements to their property and throws receipts away or doesn't have them anymore?
Acceptable audit documentation includes not just actual receipts but other forms of proof of payment and work performed, such as bank records, credit card statements, invoices, canceled checks, etc.
If it can be proven without a doubt that these improvements were purchased and performed, then the taxpayer will need to file all appropriate amended returns, amended schedules, and amended state filings for the prior three years to claim these tax benefits once and for all.
You also probably need to file a Claim for Refund of Federal Income Tax Return, etc. for each tax year. The best course of action is to do this before the Service finds it.
Does the IRS verify receipts in the process of a tax audit?
Verification of receipts is the only way the IRS can be sure the deductions were actually incurred. Losses of all kinds are not allowed at all, and if they are claimed, the income has to actually be there.
Normally, the IRS audits only the amounts claimed on a tax return without additional verification (by contacting employers, banks, charities, etc.).
In the process of an audit, taxpayers are not required to present receipts unless auditors suspect that the tax return with the claims made does not reflect the taxpayer's truth-in-lending. Auditors should consider all available evidence.
If, for example, a company's return exaggerates payments to a related company, auditors should look for letters, contracts, correspondence, or any other written material obtained from corporate accounting and identification, and such data will be used to argue over actual payments.
However, if the result is found to be correct, the IRS employee must accept the result because the production of tax records is wrong only if the employee believes that the result is incorrect.
What happens if the IRS determines fake receipts have been submitted in an audit?
If the IRS determines that a taxpayer has submitted fake receipts to reduce taxable income in an audit, first, civil fraud penalties are assessed at 75 percent of the unpaid tax.
Second, the IRS will add another 20 percent as an accuracy penalty for negligence, substantial understatements, or substantial overstatements.
Finally, the taxpayer will be subjected to criminal penalties. Even if you are not ultimately convicted of any crime, being subject to an IRS criminal investigation is expensive, time-consuming, and stressful.
Tax returns that underreport tax will be audited, and if taxpayers submit fake receipts in response to the auditor's request, the IRS will not only audit years that are still open; if the IRS can prove that fake receipts were being used in previous years as well, the IRS will assert those years as well and may assess tax for all of those open years.
However, if you filed fake receipts in response to an audit, that can be enough for the IRS to criminally prosecute you for tax evasion.
All the wealthy celebrities of the past who went to jail for tax evasion were nailed on that basis. It's hard to lie and say you had a huge charity deduction when they can still see the money in your bank. If the IRS finds you committed fraud, you are prohibited from claiming the same type of deduction again.
This is usually a huge burden for someone who was previously self-employed. They have lost a lot of the expenses they previously deducted, but not the income they reported.
Hiring an IRS audit tax professional
It is difficult to handle a tax audit alone; you need an expert to guide you on how to handle it, especially if there are IRS audit penalties. The tax professional will help you come up with tax audit defense strategies during the IRS audit appeal process.
Conclusion
Preparing for an audit and being audited with no records are bad enough, but what happens if you are audited and have no receipts? The most important thing to do is to act fast when the auditor asks for your substantiation, which includes your receipts, your income, and your deductions.
Also, know the special rules. First, never overstate anything, such as your income or your receipts. Why? Because you are not required to prove to the IRS what you said. The burden of proof is always on them.
Next, work with the IRS is reconstructing financial records. Telling them as early as possible that you have no receipts gives you a big advantage, but you must use it.
