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

If you get audited by the IRS and don’t have the receipts to support your expenses, income, tax credits, and deductions, it can lead to financial penalties, interest, back taxes, or even criminal charges. While alternative methods like bank statements and business calendars can help in these cases, it’s always preferable to avoid audits in the first place. How? Detailed, accurate financial records, accurate tax returns, and transparency with the IRS are essential. Learn about the main types of IRS tax audits, how to prepare for them, and how to resolve them in this guide.

Key takeaways

• IRS audits are performed to review your tax return compared to your financial records to look for inaccuracies and compliance problems with tax deductions and income reporting.
• What happens if you get audited without receipts depends on the type of audit you receive and the amounts being disputed.
• There are three main kinds of audits: correspondence (mail) audits, office audits, and field audits.
• You should respond to an audit notice immediately and quickly begin preparing your documentation and consulting with a tax expert.
• The best way to avoid penalties and increased tax liability when being audited is to present a detailed, organized, and accurate recordkeeping system with receipts and documents that support your tax return.
• The IRS usually reviews receipts during an audit — if you don’t have the receipts, you can sometimes use bank statements or credit card statements to prove your claims instead.
• Consequences of being audited without receipts can include additional taxes, interest, and financial penalties.
• After the audit, you’ll receive an audit report with the IRS’s findings and any additional money you owe as a result.
• You can either accept the audit report and pay the balance specified or appeal the audit and negotiate a resolution with the IRS.
• The best way to avoid audits altogether is by keeping detailed records, a task made much easier with modern accounting and bookkeeping software.

Table of contents

• Introduction to IRS audits
• Types of audits
• Responding to an audit notice
• Record keeping and receipts
• IRS audit process
• Using bank statements as evidence
• Consequences of missing receipts
• Understanding audit findings and reports
• Resolving an audit
• Avoiding IRS audits
• Protect yourself from audits with FreshBooks

Introduction to IRS audits

An IRS audit is a review of your financial records and tax return. The Internal Revenue Service (IRS) conducts audits to ensure that your tax returns are accurate and compliant with tax code, discouraging tax fraud and tax evasion, and ensuring taxpayers are paying their fair share.

Tax audits are already a major inconvenience when you’ve done everything correctly and have the receipts and statements to back up the information on your income tax return. However, if you get audited and you don’t have the necessary receipts to support your claims, it can have serious consequences on your tax liability. In this guide, we’ll explain your rights as a taxpayer during an audit and share financial records tips to help avoid them or to make the process smoother if you do end up being audited.

Types of audits

There are a few different types of audits we need to understand before looking at preventing them. The three main kinds of tax audits that the Internal Revenue Service performs are:

• Correspondence Audits: This is the most common type of audit, in which you receive a letter from the IRS requesting additional information or a notice requiring you to adjust part of your tax return.
• Office Audits: These are used for cases that are complex. In office audits, you’re called to an IRS office to examine tax issues in person with an IRS agent.
• Field Audits: This is the most in-depth type of audit, in which an IRS auditor visits your workplace to inspect on-site records and conduct interviews.

To prepare for an audit, you need to understand the type of audit you’ll receive and plan accordingly. Depending on the circumstances, the auditors may only be interested in verifying specific expenses and itemized deductions, or they may be examining your entire income tax return. In either case, it’s essential that you have all financial documents and explanations you could possibly need organized and ready before your audit.

Responding to an audit notice

If you receive an IRS audit notice or audit letter, it’s best to respond as soon as possible and immediately begin to gather your documentation. The initial audit notice will outline the scope of the audit, the type of audit that will be performed (i.e., correspondence, office, or field), and the documentation that they’ll require from you. 

We strongly recommend working with a tax professional, such as a tax attorney, when preparing for a tax audit — this offers valuable peace of mind and assurance that you’re remaining compliant with tax laws, helping you get the best possible outcome. Whether you work with a professional or not, make sure you are completely honest and transparent with the IRS agent during the entire process. This will help you avoid further penalties on your tax bill and other legal issues.

Record keeping and receipts

A consistent recordkeeping system is absolutely essential for your business. Not only does it help you track and manage expenses throughout the year, it also ensures you’re ready to explain your tax return in the event of an audit. Your recordkeeping system should clearly show your income, expenses, deductions, and tax credits for at least the past few years. This means keeping accurate records of income, receipts for business expenses, charitable contributions, entertainment expenses, account statements, and mileage records.

By keeping good records, you’ll not only find it easier to make business decisions and save time preparing your tax return, but you’ll also be prepared to prove your tax return claims in case you’re audited, ensuring compliance with tax law and protection from legal consequences.

IRS audit process

During an audit, the IRS will usually ask for receipts to verify your expenses and ensure they accurately match up with the statements on your tax return. The IRS does this to ensure taxpayers are only claiming legitimate business expenses and itemized personal expenses when filing taxes, preventing people from claiming huge deductions and illegally dodging their income taxes. But what happens if you get audited and don’t have the supporting documents to support your allowable expenses?

In some cases, auditors will accept alternatives to receipts if you can’t produce them. These alternatives may include account statements from your bank or business calendars. However, it’s always better to have more documentation to strengthen your case, which is why we strongly recommend keeping receipts and other documentation dating back at least three years.

One exception to the IRS’s policy of all claims being backed up with receipts is known as the Cohan rule. Under the Cohan rule, you can claim expenses without the receipts to prove them, provided they have a reasonable basis that you can demonstrate in the event of an audit. However, this is still subject to IRS discretion, so it’s still better to keep records of even your most reasonable expenses.

Using bank statements as evidence

Bank account and credit card statements are a valid form of alternative documentation to support business expenses during an audit, and can be used if you don’t have the necessary receipts to back up your claims. Although it’s still best to keep receipts, the IRS will typically accept these records as evidence when verifying expenses. To ensure you’re always prepared for the possibility of an audit, it’s vital to maintain accurate, detailed bank account statements and ensure that all information matches your tax returns.

Consequences of missing receipts

If you don’t have receipts to validate your expense claims and other tax reporting, and cannot prove your claims using account statements, it can lead to potentially serious consequences. To begin with, undergoing an audit without receipts might result in the IRS disallowing any expenses that cannot be proven, requiring you to pay any additional taxes owed on your new tax bill.

In some cases, the consequences of being audited without receipts can be harsher than an increased tax liability. The IRS may impose penalties and interest on these unpaid taxes, and serious tax evasion cases could even result in criminal charges. To avoid these problems, it’s best to reconstruct your records to the very best of your ability using all alternative documentation at your disposal, including bank account or credit statements. 

You can also account for certain expenses using the Cohan rule, as mentioned above. Note that it is a very serious offence to fake receipts during an audit (or any other time), so it’s better to be honest about not having one if you get audited. Creating fake receipts is considered tax fraud and can lead to severe penalties, including criminal charges.

Understanding audit findings and reports

After the investigation part of the tax audit is finished, the IRS will provide an audit report, which outlines their findings and any additional taxes you may owe. When you receive this report, it’s important that you review it extremely carefully, ensuring you understand the findings completely. This ensures there are no miscommunications, allowing you to determine the next steps to resolve the situation.

Your IRS audit report can show a few different things depending on your case, including disallowed expenses that cannot be claimed, additional amounts to be paid on your tax bill, and any penalties you are liable to pay. Taxpayers have the right to appeal the findings of an audit. If you choose to go down this route and your appeal is successful, you’ll have the opportunity to negotiate a resolution with the IRS directly, usually with the help of a tax lawyer.

Resolving an audit

After receiving your report and IRS audit ruling, you must resolve the situation by agreeing to its findings and paying any additional taxes, interest, and penalties you owe. Alternatively, you can request audit reconsideration and attempt to negotiate a resolution with the IRS. For the most efficient resolution and the best possible outcome, it’s highly recommended to consult with a tax attorney, accountant, or another audit representation professional for guidance and advice on your options and the best course of action after being audited.

Avoiding IRS audits

Of course, no one wants to be audited. It can be a stressful, time-consuming process, even if you haven’t made any mistakes or intentionally done anything wrong. To reduce the likelihood of an IRS audit in the first place, it’s essential that you keep accurate, detailed financial statements and records dating back at least three years, and only report tax filing information that you can reliably support with your recordkeeping. 

Typically, audits are reserved for ‘red flags’ on tax returns, such as excessive business expenses or huge variations in income and expenses from year to year. To avoid your return being flagged in the IRS system, make sure your returns are 100% accurate according to your receipts and other records. We also suggest working with a tax professional throughout the year (and especially at tax time). This ensures total compliance with all tax codes and laws, dramatically reducing your risks of being audited.

Protect yourself from audits with FreshBooks

As we’ve learned, accurate records are one of the most important parts of protecting yourself from an IRS audit. But for many small business owners, keeping detailed records is a time-consuming task that often becomes a low priority compared to day-to-day business operations. If you’re looking for a fast, easy, and streamlined way to keep tax-compliant financial records, FreshBooks is here to help.

Our cloud-based accounting software is a great way to keep organized records to support your tax return in case of an audit. There are countless great features designed to make recordkeeping simpler for business owners, such as digital receipt capture, automated expense tracking, detailed financial reports for easy audit preparation, and cloud-based access to all your records in one easy platform. 

FreshBooks doesn’t just protect you from audits — it also helps you run your business with confidence, knowing that your finances are tracked, organized, and accounted for. To learn why so many business owners trust this tool with their recordkeeping and audit prep process, try FreshBooks for free today!

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