So you’re facing an audit and your records, or a portion of them, have gone missing. Or, you’re just a normal entrepreneur chasing from one project to another and your record keeping habits were just, well, not habits at all. You may not be able to produce receipts, bills or other written documentation for all the items on your tax return. That’s when you must turn to reconstructing your records or gathering together the best proof you have for the IRS.
The law does not require perfect record keeping habits—it’s just simpler that way. It’s perfectly legal to reconstruct your records in any way to provide adequate evidence that what you claimed on your return was, in fact, accurate.
For interest payments, medical expenses and the like, one way to reconstruct your records is to secure a statement or affidavit from the parties involved. Or, you may be able to prove your expenses by reviewing your credit card statements even with the receipts are missing.
One exception, in the case of contributions of more than $250 to charitable organizations you are required by law to have obtained a receipt by the time you filed the return on which you are claiming the deduction. Contrary to what some think, this rule does not eliminate your options if you lost the receipt. You have to prove only that you had it at the time. A statement from the charity or a photocopy of the receipt from its records is sufficient.
Interest is usually fairly easy to reconstruct. If you received or paid interest, get a statement from the other party. With a contribution of clothing to a charity, you might prove the value by itemizing the articles donated, their dates of purchase and the prices you paid. Try to show the auditor a pattern of clothing purchases you have for keeping up with style and the stores where you buy clothing to indicate the level of prices you typically pay.
When statements from involved parties are lacking, try to gather facts that will prove a deduction. You may have an appointment book or diary that indicates you attended a seminar or event in which travel expenses were incurred. In the case of a casualty loss, for example, you can get a copy of a police report to show the auditor that the loss did, in fact, take place.
My experience has been that, for the most part, most auditors probably will give you the benefit of the doubt if your secondary proof is orderly and represents your honest intentions.
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