IRS Audit and No Receipts: What Actually Happens

You are in an audit, the examiner has asked for support on a list of expenses, and some of the receipts are gone. This is a common position to be in and it is not automatically fatal. It is also not nothing. What happens next depends almost entirely on which category the expense falls into.

The default rule

You claimed the deduction, so you carry the burden of proving it. If you cannot substantiate an expense, the examiner can disallow it, and the additional tax comes with interest and potentially a 20% accuracy-related penalty under Section 6662.

That is the starting point. There are two things that move you off it.

The Cohan rule

In 1930, the Second Circuit heard the case of Broadway producer George M. Cohan, who had clearly incurred substantial business travel and entertainment costs but kept no records of them. The court held that where a taxpayer plainly incurred deductible expenses, the court should estimate a reasonable amount rather than disallow everything, bearing heavily against the taxpayer whose own inexactitude created the problem.

Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), is still good law. It is the reason a missing receipt for lumber, subcontractor labor, small tools or job site supplies does not necessarily wipe out the deduction. You still have to convince the examiner or the court that you actually incurred the cost and give them a rational basis for the number.

Where Cohan does not save you

This is the part that catches contractors out. Congress overrode the Cohan rule for certain categories in Section 274(d). For those, no estimate is permitted. No documentation means no deduction, full stop, no matter how obvious it is that you incurred the cost.

Strict substantiation applies to:

• Travel, including lodging and meals while away from home overnight
• Business meals
• Business gifts
• Listed property, which for most contractors means passenger vehicles

For each of these you need the amount, the time and place, the business purpose, and for gifts and meals the business relationship of the people involved. For vehicles you need mileage, dates and purpose. A truck used partly personally with no mileage log is the single most commonly disallowed item in a contractor audit, and Cohan will not help.

Two things worth knowing. Computers and peripherals came off the listed property list for property placed in service after 2017, so those are back under ordinary substantiation. And entertainment is no longer deductible at all, so the question there is not documentation but eligibility.

What to do before you tell the examiner you have nothing

Most people who say they have no receipts actually have a substantial reconstruction available. Work through these before you concede anything:

• Bank and credit card statements. They establish the amount, the date and the payee. They do not by themselves establish business purpose, but they get you most of the way.
• Vendor duplicates. Supply houses, lumber yards, equipment rental companies and fuel card providers can usually reprint a full account history for a year in a few minutes. Ask.
• Job files and estimates. A cost breakdown tying material purchases to a specific job is strong evidence of business purpose.
• Calendars and dispatch records. These reconstruct travel and mileage patterns from contemporaneous data.
• Photos and text messages. Timestamped site photos and messages to subs and suppliers date and locate activity.
• Cancelled checks and lien waivers for subcontractor payments.

A reconstruction assembled from independent third-party records is meaningfully stronger than a spreadsheet you typed from memory, and examiners treat it that way.

The receipt threshold people misremember

Under the regulations you generally do not need a documentary receipt for a travel or lodging-adjacent expense under $75, other than lodging itself. That does not mean the expense needs no record. You still need the amount, date, place and business purpose written down. The relief is from keeping the paper, not from keeping the information.

Going forward

The fix is boring and it works: photograph receipts at the point of purchase into a job-coded folder, run a mileage app that logs automatically, keep the business accounts genuinely separate from personal, and reconcile monthly rather than in March. Contemporaneous records are the difference between a two-hour audit and a two-year one.

The short version

Missing receipts for materials, supplies and subcontractors are usually survivable under the Cohan rule if you can reconstruct the spending from third-party records. Missing records for vehicle mileage, travel, meals and gifts usually are not, because Section 274(d) forbids estimates in those categories. Reconstruct everything you can from bank statements and vendor histories before you assume a deduction is lost.

General information, not legal or tax advice for your situation. Audit outcomes depend on the specific facts, the records available and the examiner. If you are under examination, get representation before responding. Accounting Solutions LLP works with construction contractors nationwide.

Disclaimer: This content is provided for educational purposes only and is not legal, tax, accounting, or financial advice. Every situation is unique, so consult your own attorney, CPA, or financial advisor before making decisions based on this information.