Rental expense with no receipt

[Questionguy101]

Taxpayer hired someone to fix up his rental property last year. But he paid the contractor cash so he has no documentation at all. But he wants to claim the expense. What would you do?

[Burke]

Make him go get a receipt from the contractor. Or no deduction.

[MAMalody]

We are not required to audit a clients expense records to see if they meet any specific criteria. In fact the IRS auditor is not required to have every expense documented when he performs an audity. When a client tells me he has an undocumented expense(s) I make the determination on whether to deduct based upn my judgment of the clients "trustworthyness", the dollar amount, and what it is. Having said that, I do prefer documentation for everything on the tax return.

[Roberts]

I don't need a receipt if the client says they paid the bill.
I WILL explain to them the potential for penalties and interest if the IRS decides a receipt is required at a later date and we can't provide one.

[taxea]

How much did the client pay for the work? Does the worker have a business doing this type of work? If over 600. I would have the client give a 1099misc to the worker. Nothing in the code prohibits issuing the 1099. I know rentals don't require this but it is one way to document the payment. Or include the name address and any other identifying information client has for the worker on the tax return. Advise client in the future not to pay cash for anything related to the rental. Be sure client knows that he may receive a letter from the IRS if he takes the expense.

[ATSMAN]

Taxpayer hired someone to fix up his rental property last year. But he paid the contractor cash so he has no documentation at all. But he wants to claim the expense. What would you do?

In general you will find that the landlord purchased the parts and supplies at HomeDepot and had a "handyman" work on it and paid cash. They may have receipts for the supplies it is the labor charges that they don't have any receipt. Last year I refused to put a $10,000 roof repair expense because the taxpayer said he paid all cash and the supplies were provided by the handyman. I told him to get me some documentation (in our county you have to pull a permit to replace roof) and he could not even come up with that. Just to be nosy, I drove by his rental unit and saw that what he had done was apply asphalt coating to the shingles because his gutters were still dripping black!

[Burke]

The fact that he paid cash was a problem for me. If he had a cancelled check and no receipt, I would do it and explain that the IRS might not accept it. But cash? Maybe for a few minor supplies, but not labor. They pay cash to keep it under the table for the recipient, but I don't want to aid and abet, not with these new rules about due diligence or "had reason to know."

[Openfire]

It is interesting that many taxpayers feel that if they can get something past us, they are no longer responsible for what they are claiming. I tell my clients that I am not auditing them. They do not have to prove expenses to me, but if they are audited by the IRS, they will be responsible to produce a receipt, or to prove the expense. I feel this puts the burden back on them, and keeps them focused on their responsibilities as a taxpayer.

[MAMalody]

Good point, however, he is not preparing the recipient's tax return, he is preparing the payors tax return. If there is labor involved that would require a 1099 then all he needs to do is to ask if a 1099 was prepared and sent. If not, make a written recommendation to the client the 1099 requirements and indicate that he should send one out and that he can provide that service if the client would prefer not to do it himself. That would cover you as a preparer about any "due diligence." Also, you do not know that the recipient did not report it. There are still a lot of folks out there who do not know 1099 requirements. I do appreciate you caution and concerns and it reminds me to tread carefully in areas that can be a problem. Thanks.

[Openfire]

Excellent point.

[taxea]

l agree and would recommend a 1099misc be sent to the client (see my prior post). Be sure your client understands the consequences he brought upon himself by paying cash. If he has receipts for the materials he can take that expense but with no receipt from the worker I would recommend against expensing the cash. Technically you can't refuse to include it however if he insists I would not do the return rather than refusing to input the labor expense.

[TXEA]

My position is that cash expenses are a always a red flag for me as the tax preparer. Cash with a receipt I can live with, but cash without a receipt, it's a problem. The client can go get a receipt, and I can probably live with it.

Circular 230 does not require us to audit a client; however, it does require us to follow up on information known to us that a normal prudent preparer would review further.

I do not ask for receipts unless the item I have noted requires further review; however, once the client volunteers the information, then I have to deal with it and make a judgement.

Ask the question: "Can the expense be sustained on its own merits?"