As former IRS agents is not unusual to have taxpayers who are being audited by the IRS tell you they have no receipts.
We are a local South Florida tax firm that specializes in IRS tax audit defense.
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We know more about IRS audits than almost every firm in South Florida.
With or without receipts we can still defend an IRS tax audit, there’s a special way to provide tax defense for those without receipts.
There are several different methods to prepare for an IRS audit for those few have no receipts and no records.
Depending on a taxpayer situation we careful review of the facts for a tax reconstruction can be made based on various factors
As former IRS agents, we carefully review the years of records missing and try to reconstruct the income that a person had during those years.
Generally, we try to reconstruct what the possible income was for a given year. To do that, we take a financial statement for that given year to find out what a person’s expenses were on a monthly basis.
As a general rule, we can ascribe between 28 to 33% for a base rent or mortgage.
If you will ascribe to a base rent of $2000 for a given year one would probably calculate with reasonable percent accuracy the other 67% would be allotted toward other expenses.
With that being said, the total monthly income would be $6000 and using a multiplier of 12 months, the income would be approximately $72,000.
That is one way to ascertain what total income would be. There are so many variables involved, you cannot possibly within the space of this blog cover everything but I’m giving you one example as a former IRS agent that I would look to come up with yearly income. Reasonable expenses can easily be determined to lower the tax bill for that given year.S
So, the 1/3 2 third’ rule is simply this, one-third of your income goes to necessary living expenses in the other two-thirds cover other expenses.
If you own a business and you’re missing the records there is the Cohan rule to look at.
Few people know the Cohan rule.
What is the Cohan Rule?
George M. Cohan was a very well-known Broadway star in the early 1900s. He has a famous performance, Give My Regards to Broadway.
Interestingly, his legacy is also closely connected to tax law.
Cohan was audited by the Internal Revenue Service, yes they had audits going on at that time to, and was told that he was not allowed to deduct many of his business and entertainment related expenses because he did not keep all of the necessary receipts.
Mr. Cohan did the right thing and he appealed this ruling and the courts actually sided with him, forcing the IRS has to accept estimates of his expenses.
The Cohan Rule is now a law that allows taxpayers to deduct some of their business-related expenses even if the receipts have been lost or misplaced so long as they are reasonable and credible. The key word here is reasonable and credible. What is necessary here is reasonable and credible tax reconstruction.
Based on the Cohan ruling, the IRS must allow you to deduct some of your business expenses, even if you do not have each and every receipt to back them up.
Keep in mind, however, that the IRS expects that you to provide credible evidence of these expenses and while you might not have an actual receipt, you can also show pertinent records like calendar notice, canceled checks, logs, third-party documentation or other notes to indicate that you are not fabricating this expense.
Other Questions To Ask:
Why am I being selected for an audit?
Selection for an audit does not always suggest there’s a problem. The IRS uses several different methods:
• Random selection and computer screening – sometimes returns are selected based solely on a statistical formula.
IRS compares your tax return against “norms” for similar returns. IRS develops these “norms” from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts.
The IRS uses this program to update return selection information.
• Related examinations – IRS may select your returns when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.
Next, an experienced auditor reviews the return.
They may accept it or if the auditor notes something questionable, they will identify the items noted and forward the return for assignment to an examining group.
Please Note: filing an amended return does not affect the selection process of the original return. However, amended returns also go through a screening process and the amended return may be selected for audit. Additionally, a refund is not necessarily a trigger for an audit.
How am I notified?
Should your account be selected for audit, IRS will notify you by mail. IRS won’t initiate an audit by telephone.
How will the IRS conduct my audit?
The IRS manages audits either by mail or through an in-person interview to review your records.
The interview may be at an IRS office (office audit) or at the taxpayer’s home, place of business, or accountant’s office (field audit).
Remember, you will be contacted initially by mail.
The IRS will provide all contact information and instructions in the letter you will receive.
If IRS conducts your audit by mail, our letter will request additional information about certain items shown on the tax return such as income, expenses, and itemized deductions. IRS audits 1.4 million taxpayers through IRS correspondence audits.
If you have too many books or records to mail, you can request a face-to-face audit.
The IRS will provide contact information and instructions in the letter you receive.
Depending on the issues in your audit, IRS examiners may use one of these Audit Techniques Guides to assist them. These guides will give you an idea of what to expect.
What do I need to provide?
The IRS will provide you with a written request for the specific documents we want to see.
The IRS accepts some electronic records that are produced by tax software. The IRS may request those in lieu of or in addition to other types of records.
The law requires you to keep all records you used to prepare your tax return – for at least three years from the date the tax return was filed.
How do I know if the IRS received my response?
For any delivery service you may use, always request confirmation that the IRS has received it. For example, if you use the US Postal Service, you can request one of their additional services to ensure delivery confirmation.
How far back can the IRS go to audit my return?
Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. IRS usually does not go back more than the last six years.
The IRS tries to audit tax returns as soon as possible after they are filed.
Accordingly most audits will be of returns filed within the last two years.
If an audit is not resolved, we may request extending the statute of limitations for assessment tax. The statute of limitations limits the time allowed to assess additional tax.
It is generally three years after a return is due or was filed, whichever is later.
There is also a statute of limitations for making refunds. Extending the statute gives you more time to provide further documentation to support your position; request an appeal if you do not agree with the audit results; or to claim a tax refund or credit. It also gives the IRS time to complete the audit and provides time to process the audit results.
You don’t have to agree to extend the statute of limitations date. However, if you don’t agree, the auditor will be forced to make a determination based upon the information provided.
How long does an audit take?
The length varies depending on the type of audit; the complexity of the issues; the availability of information requested; the availability of both parties for scheduling meetings; and your agreement or disagreement with the findings.
How does the IRS conclude an audit?
An audit can be concluded in three ways:
• No change: an audit in which you have substantiated all of the items being reviewed and results in no changes.
• Agreed: an audit where the IRS proposed changes and you understand and agree with the changes.
• Disagreed: an audit where the IRS has proposed changes and you understand but disagree with the changes.
What happens when you agree with the audit findings?
If you agree with the audit findings, you will be asked to sign the examination report or a similar form depending upon the type of audit conducted.
If you owe money, there are several payment options available. Publication 594, The IRS Collection Process, explains the collection process in detail.
What happens when you disagree with the audit findings?
You can request a conference with an IRS manager.
The IRS also offers mediation or you can file an appeal if there is enough time remaining on the statute of limitations.
IRS Tax Audit + Little or No Records/ Receipts + Former IRS Agent Tax Audit Help + Ft. Lauderdale, Miami, Palm Beaches, Boca Raton + Broward, Dade Counties
