Receipts for items purchased less than $75 - tax audit Information Document Request

[Judy rocks]

The Revenue Agent at this restaurant tax audit is demanding physical receipts for items purchased in Cost of Goods Sold that are less than $75. Many items are less than $5. My position is that she can't request physical receipts for items purchased for less than $75. She is complaining that the vast number of very small purchases indicates a valid request. My position is also that the de minimus rules apply as do the Materiality principle of accounting. The auditor is requesting a cite for my position. Any suggestions??

[kathyc2]

Not sure if it would work in your situation but I believe you are referring to the Cohan rule.

[ttbtaxes]

Just curious....why wouldn't the client have receipts for purchases related to COGS? Usually restaurants buy from suppliers and have voluminous invoices and statements. What is the nature of the small items you mentioned, less than $5? Was it from a supplier, Walmart, etc? Can they get documentation from the business they bought those small items from?

De minimus rules relate to asset purchases. Not sure how they could apply here.

[TAXNJ]

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The Revenue Agent at this restaurant tax audit is demanding physical receipts for items purchased in Cost of Goods Sold that are less than $75. Many items are less than $5. My position is that she can't request physical receipts for items purchased for less than $75. She is complaining that the vast number of very small purchases indicates a valid request. My position is also that the de minimus rules apply as do the Materiality principle of accounting. The auditor is requesting a cite for my position. Any suggestions??

What is the basis your position of "My position is that she can't request physical receipts for items purchased for less than $75." - tax code section (not accounting)?

What % do the items represent of total purchases? If 1% may not have an issue but if a large % is an issue.

If paid by check or credit card to the vendors, then see if that will be acceptable or ask the vendor for a SUMMARY of purchases by your client.

As you know, substantiate, substantiate, substantiate as the IRS states and requires.

[New York Enrolled Agent]

The Revenue Agent at this restaurant tax audit is demanding physical receipts for items purchased in Cost of Goods Sold that are less than $75. Many items are less than $5. My position is that she can't request physical receipts for items purchased for less than $75. She is complaining that the vast number of very small purchases indicates a valid request. My position is also that the de minimus rules apply as do the Materiality principle of accounting. The auditor is requesting a cite for my position. Any suggestions??


Sorry but the auditor can request receipts in the COGS for amounts under $75. You may be confusing the $75 rule in Reg. §1.274-5(c)(2)(iii) which is for the §274 expenses for meals, etc. The notion of a vast (your word) number of small expenditures perhaps suggests less than adequate records.

However, there is some hope in the IRM. Look at §4.7.10.4.2 - you might find some help there.

[TaxGuyBill]

I think you need the receipts.


A taxpayer "shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information".

https://www.law.cornell.edu/cfr/text/26/1.6001-1

Expenses in connection with §274 (travel, entertainment, etc.) require receipts for items $75 or more, but that doesn't Regulation doesn't apply to other expenses. HOWEVER, you may be able to argue that if the strict requirements of §274 set the limit at $75, that other expenses should be even more relaxed. On the other hand, you probably DO still need to show that a payment was made (such as a bank statement or credit card statement).

https://www.law.cornell.edu/cfr/text/26/1.274-5

"A taxpayer has the burden of proving payment of an amount." "Proof of payment of an amount alone does not establish that a person is entitled to a tax deduction. A taxpayer should also keep any other documents that may help prove entitlement to a tax deduction (for example, receipts, sales slips, charge slips, payment acknowledgements, check registers, and carbon copies of checks).

http://bradfordtaxinstitute.com/Endn...Proc_92-71.pdf

[TAXNJ]

Nyea

Does "IRM. Look at §4.7.10.4.2 - you might find some help there." apply here ?

[ATSMAN]

Expenses in connection with §274 (travel, entertainment, etc.) require receipts for items $75 or more, but that doesn't Regulation doesn't apply to other expenses. HOWEVER, you may be able to argue that if the strict requirements of §274 set the limit at $75, that other expenses should be even more relaxed. On the other hand, you probably DO still need to show that a payment was made (such as a bank statement or credit card statement).

I ran into this very issue with two of my clients in the past and since then I have advised all my clients to keep a copy of the receipt (unless it is itemized in their business credit card statements).

The tip off for the agent is a lot of small value expenses from Walmart or other department stores. Most business accounts have a supplier that supplies them even the toilet paper rolls and it is nicely itemized in their monthly invoices.

Just curious what is the total amount being challenged and how many separate items/charges are involved?

[New York Enrolled Agent]

Does "IRM. Look at §4.7.10.4.2 - you might find some help there." apply here ?

NJ - you are correct - it does not.

However, IRM §4.10.7.4.2 might.

[TAXNJ]

Nyea - yes

Does "IRM. Look at §4.7.10.4.2 - you might find some help there." apply here ?


However, IRM §4.10.7.4.2 might.



Thanks NYEA - good info for Original Poster to reference