Documentation is important when deducting an expense, especially if you are self-employed or have a small business.
When the IRS comes knocking for an audit, it is important to first identify what expense is being questioned, and then provide the IRS with your documentation. You should keep the proof you need in an account book, diary, and log, statement of expense, trip sheets, or similar record. You should also keep documentary evidence that, together with your record, will support each element of an expense.
What happens if you've lost the receipt or it was destroyed? The IRS allows for receipts to be substituted with other documentation that prove the expense. Documentary evidence is not needed if any of the following conditions apply.
Your expense, other than lodging, is less than $75. You have a transportation expense for which a receipt is not readily available, such as a taxi ride in which you paid cash.
What is the importance of "less than $75?"
In 1930, George M Cohan (famous for "Give My Regards to Broadway") challenged the IRS regarding an audit that resulted in the IRS disallowing deductions for missing receipts. The court ruled that other documentation could be allowed if they could show the expense was business related.
Thus, the "Cohan Rule" as it is known, is almost 70 years old, but it has withstood the test of time. The decision still stands that direct records are not needed to verify an IRS expense deduction. If you can reconstruct the evidence, you can use that to make a reasonable estimate for the deduction.
If your return is examined, you may have to provide additional information to the IRS. This information could be needed to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed.
Don't panic if you can't find the receipts.
Prove the relationship of the expense to your business. For example; If you are a handy man and have your own business, it is acceptable to recreate your mileage based on the invoices you billed the client.
If it shows that Marx Realty paid you to repair a home in another city, the invoice showing the payment, can help recreate the mileage.
It is reasonable that if you received payment for the repairs, you had to get to the home to complete the repairs.
In addition, store receipts for supplies and materials can be used to add the mileage to the store.
This is why it is important to document on a log, dairy, or schedule your activities. Looking back to a date marked can joggle your memory in regards to mileage, expenses, and even income.
For more information on receipts and documentary evidence go to: http://www.irs.gov/pub/irs-pdf/p463.pdf.
Tracy Bunner is an enrolled agent and tax preparer with an office in Harrisville. She can be reached at 801-686-1995 or at firstname.lastname@example.org.