What Happens If You Get Audited and Don’t Have Receipts?

The last thing any small business owner wants is an audit notice from the IRS. But there is a certain comfort in knowing your returns are accurate and you have the paperwork to back them up. That way, you know you'll have a strong defense. But what happens if you get audited and don't have the receipts?

The consequences of lacking verifiable paperwork during an audit can vary; it's not a situation you want to find yourself in. But if this is your situation, or you would like insight to avoid such missteps, read on. 

How do I know if I’m being audited by the IRS?

The IRS sends notices and official communications exclusively through the United States Postal Service. The IRS will never contact you by phone, text message, or email. These types of communications are scammers attempting to get personal information from you; Discard any such messages.

However, once you do receive official notice from the IRS of an audit, it's time to spring into action. This includes developing an action plan, creating a communication strategy, and preparing the necessary financial statements and accounting documents to mount a robust defense. 

Does the IRS verify receipts during an audit?

Underreported income is a common reason a small business would get audited. When determining whether to audit you, the IRS cross-references your industry and locality to determine what the average deductions for a similar business would take and how much.

The IRS will verify copies of receipts for accuracy during the audit for underreported income or for other issues. If the materials provided fail to pass IRS receipt requirements for the items in your return, the IRS will request additional materials from you. 

What happens if you get audited and don't have receipts?

If you get audited by the IRS and don't have receipts, it's not an immediate cause for panic. The IRS understands that receipts can be misplaced and will accept alternative forms of documentation. In place of original receipts, you can provide an expense report detailing your costs. It's important to ensure that the reported expenses are deemed 'reasonable' by IRS standards. This is based on averages for similar small businesses in your state and industry. Without proper documentation, deductions may not be accepted and you could be subject to additional taxes, penalties, or interest. It's always a good idea to consult with a tax professional who specializes in audit defense and can provide guidance and advice.

Steps you can take to recover receipts for your IRS audit

There are steps you can take to generate the IRS expense report they will be expecting in place of your receipts. There are three tried and true places to check while generating this report:

1. Business calendars and credit card statements. 
2. Vendors you've used will likely be able to generate replacement receipts.
3. Relevant bank statements will aid in piecing together an accurate picture of qualified business expenses. 

Are there penalties or fines if I’m unable to recover my receipts?  

If the IRS accepts the report you've generated detailing your business expenses, you will not receive a penalty, thus concluding your audit. But there is a chance that the IRS will reject some or all of your deductions, which is called a “disallowed deduction.”

There are financial consequences associated with disallowed deductions. Every deduction the IRS disallows will be added to your taxable income, which means your tax bill will increase. The increases could push you into a higher tax bracket, which means you will pay more on your taxable income for the associated calendar year.

If that isn't bad enough, you will also be responsible for interest and fees associated with your disallowed deductions. If these penalties are not paid in a timely manner post-audit, the IRS may also hit you with additional penalties.

It is in your best interest to address every aspect of your audit immediately, from gathering documents to paying late fees. 

Protect yourself with professional audit defense

The benefits of a robust audit defense are numerous. 1-800Accountant’s Audit Defense service ensures all of your income tax audit materials are in order and ready for IRS scrutiny. This also helps you avoid any future mishaps. Audits happen, so it's best to be prepared!

It can be tough figuring out who to turn to for help, but 1-800Accountant is here to make it easier. Along with services like small business taxes and tax advisory, we'll connect you with a tax professional who's well-versed in your industry and local state tax laws. We will help you maximize your annual tax savings and keep your materials audit-ready!