Appropriated response?

[Questionguy101]

"I paid someone in cash to fix up my rental property and I have no receipt for it. Can I claim the expense?"

I think every one of my fellow tax practitioners has been asked a question like this before. My usual response is: "Technically, you are eligible to claim an expense if you have really paid for it. But since you don't have a canceled check or a receipt to substantiate your claim, your deduction can be disallowed during an audit. And you may be penalized too."

I will claim the expense for them as long as they give the information to me in writing.

Opinion?

[Gary2]

Off the top of my head, the only expenses that absolutely require a receipt before you can even claim them are charitable contributions on Schedule A. Even a mileage log or other listed property records allow some wiggle room, indirect or circumstantial evidence, etc.

I will claim the expense for them as long as they give the information to me in writing.

I'm not sure if you're asking for a receipt or other evidence, or if you're merely asking that they put down a number in writing to protect yourself. If you're asking for evidence, I think you need to give a suitable warning, and advise on the sort of evidence they should put together now (name and address of person they paid, dates, photographs, description of issues that needed to be fixed, third party corroboration, etc) as well as in the future. If it's more than $600, then even if not required for 2010, a W-9 and 1099-MISC wouldn't be a bad idea.

If you're asking for something in writing to protect yourself, I suppose your E&O insurance carrier may have their own requirements, and you may want it for your own comfort. But, with the exception of EITC due diligence requirements, I've never heard of the IRS requiring preparers to review client's records, let alone keep copies of them.

[Burke]

I had the same situation last year. TP wanted to deduct $1,000 for some work done on a rental property. (He always gives me all the receipts.) I told him there was none for this expense in his papers. No, he didn't get one. So, I asked if he had a cancelled check. No, he had paid it in cash. $1,000 paid in cash? Come on, I didn't fall off the turnip truck yesterday. Yes, I know lots of people deal in cash -- this one does not. So I did not put it on the return. Guess what? This year, there is a receipt (for 2010) for $1,000 worth of work from a local contractor.

[BHoffman]

The 2011 1099-MISC requirement for rental properties should take care of this problem

[AccTaxMan]

This problem is very common when we are talking about the car expense deduction. Often your client would tell you they have really used their car for business but did not keep the daily mileage log. I always tell them they may have problem in times of an audit. But if they still decide to go ahead, I will claim it for them. But I will also advise them to use their memory to reconstruct the record.