Missing receipts

[DTS]

I'm putting together receipts and documents for an '08 audit. Client is missing a box with about 6 months of receipts (CC, invoices, gas, cash purchases, etc). All income is accounted for, but she cannot locate the box that had the receipts anywhere. Nothing fishy going on here and nothing to hide. Client is still looking, but I'm not hopeful.

I can show a prior history before and after this missing time period with receipts and I have cancelled checks and proof of electronic payments for the missing items in question. Will this be sufficient for the IRS? I suspect there may be an issue with the gas receipts and the few meal receipts, but what about the rest?

Thanks.

[JohnH]

Depends entirely on the auditor. I had one one time who was missing the middle dozen or so pages of her mileage log. There were also drawings on some of the remaining pages which her 3-year old had sketched. The auditor allowed us to use mileage estimates for the missing pages to tie back to the return. Another auditor might have taken the position of "no log, no deduction" and I'm not sure what we could have done about it.

I would expect that your situation may well depend upon how reliable the existing info is, plus whatever third party info you may be able to provide to support the missing info. (copies of canx checks, bank statements, credit card statements, vendor statement copies, etc.) There are some creative ways to reconstruct if the dollar amounts are high enough.

[Lion]

I agree

I agree with John. It depends on the auditor. And then if the auditor might be willing to accept a gap, it depends on how well the auditor has accepted all the well-documented time, whether anything makes him think your client is slipping in personal expenses or already pushing the envelope.

Let your client know that she could lose those deductions in a worst case scenario. She might be willing to spend some more time and money to order copies of cc receipts, get her largest vendors to copy her on her 2008 purchases, etc. If she can document many of the missing expenses, she'll be better off; and just maybe the auditor will be more willing to accept smaller deductions with missing receipts. Tell her to work on the largest amounts first.

Try to get things in front of the auditor that are well documented first, maybe pulling out her income and supporting with bank deposits. Show a 2007-2008-2009 P&L to note the trend in income. Point out the trend in expenses from year to year before you expose the gap in expense documentation.

I had a client that paid huge fees to get check copies for a year, but we convinced the auditor to accept his check register for another year after she saw our bankers boxes full of documents. You never know. But, prepare your client for the worst.

[DTS]

John and Lion

Thanks to both of you for your thoughts. I may be OK, but I was trying to avoid the "may be", if possible. I'll put as much backup together as possible and tie it all together best I can and if that is all I'm able to put forth, that's all that can be done. The appearance of this is not good when it entails this much documentation.

My client and I were both very careful to be accurate in all reporting of items and having supporting docs throughout the years and now to find out 6 months of backup down the drain, willy-nilly, is just not setting well with me.

Thanks again!

[JohnH]

Things happen. If it were easy the clients wouldn't need us.

Depending upon the situation, it's interesting how often a large amount of missing info can be reconstructed fairly easily. Sometimes a single credit card can account for 30-40-50% of expenditures. Or transcripts of statements from 2 or 3 vendors can verify over half the amount paid out. Look at the expenditures by amount top-to-bottom and you may find that one or two letters to credit card companies or vendors may produce a huge amount of supporting documentation. If it's important enough, send the request via certified mail with return receipt. An extra $5 in postage can pay off many times over.

Even if there isn't time to obtain the transcript info for the audit, having the letters in your hand showing that the info is coming (plus whatever analysis you can show) may be enough to convince the auditor that the deductions are legitimate. They want to close the audit as quickly as you do, and if you have a smart auditor they may conclude that waiting for the backup won't generate any additional tax revenue.

This may be an opportunity to turn a negative into a positive. Time is on your side, provided you're confident that the deductions are legitimate.

[DTS]

John

Thanks for the add'l information on this. I called the gal after you posted and we'll meet on Thursday to go over some of this and see if it will help the situation out. I'm hopeful it might. Thursday will give me a bit more time to see how we stand, document-wise, and how I can make a case on what I have and don't have and then go forward from there.

Thanks again.

[JON]

"Cohen rule"

it won in court years ago. He had some verification, but not all. It came back a little 10 years ago on auto record keeping. If you had an adequate record keeping for a sample period of the year (3 month?) that may accept your deduction. Cohen was years ago before the 50% entertainment was in and I think most of his deduction questioned was for entertainment(as I remember it). I have always wondered if it would work in today's world. That was back when cash was used for a lot of transactions.

[JohnH]

I think the Cohen rule would be the final fallback position, only to be used as a last resort after all other options have been exhausted. And then only if there are lots of dollars at stake.

In most cases the most effective & efficient approach is to show the auditor that all reasonable means of reconstruction were employed and to assign a believable confidence level to the results. If winning the auditor over to your approach fails, then in the majority of cases the costs of appealing the auditor's decisions won't justify the potential tax savings.