| I regularly receive email from sincere folks who ask | | | | was spent on materials, 25% went toward |
| questions like this: "Is it true? If I don't have good | | | | subcontracted labor, and the rest went to pay other |
| records, will I really pay more tax than I could/would | | | | miscellaneous expenses and debts. |
| should have?" | | | | The IRS said, "Prove those deductions." Mike said, "I |
| Or how about this one: "If I don't have receipts, does it | | | | don't have any records. They were lost when I |
| really matter? If I get audited, will the IRS nail me for | | | | moved." The IRS said, "Sorry, Mike. No receipt, no |
| not substantiating my deductions?" | | | | deduction." |
| The answer to every one of those questions is an | | | | End result: Mike was "nailed" by the IRS with a tax bill |
| emphatic "Yes!" And if you think I'm just making this | | | | to the tune of $1,625. Because he didn't have any |
| stuff up to scare you, well, think again. And here's the | | | | written record of his deductions, his deductions were |
| proof that the IRS does really "nail" the average Joe | | | | disallowed. |
| for not having receipts. | | | | There you have it. It does happen. And it can happen |
| I'd like you to meet an average Joe, although his name | | | | to you, if you choose to Be Like Mike. |
| is really Mike -- Michael Robert Cottrell. Mike was | | | | NOTE: The information about Mr. Cottrell is a matter of |
| self-employed and made about $5,700 in | | | | public record -- Michael Robert Cottrell T.C. Summary |
| self-employment income one year. He didn't report that | | | | Opinion 2003-162. |
| income because he thought, "I have at least that much | | | | Yes, there are a few exceptions to the "No receipt, no |
| in expenses, so my expenses offset my income and I | | | | deduction" rule. For example, you can deduct your |
| really didn't make any profit. So there's really no need | | | | vehicle expenses based on mileage rather actual |
| to report the income or the expenses." | | | | expenses. This is known as the Mileage Rate method, |
| Well, Mike got audited by the IRS, and when the IRS | | | | and you do not have to keep receipts to use the |
| told him to "prove" those deductions with a paper trail, | | | | Mileage Rate method. |
| Mike was unable to do so. He literally had no records | | | | But generally speaking, it's best to cultivate the habit of |
| whatsoever to document his claim that his net profit | | | | keeping your receipts and filing them in a |
| was zero. | | | | well-organized record keeping system. Otherwise, you |
| He admitted to receiving the $5,700 in income, but then | | | | take the risk of running afoul of the IRS, and that will |
| proceeded to claim that about 50% of that income | | | | not bode well for you on Audit Day. |