A missing receipt does not settle the audit. Courts can estimate a deductible expense you clearly incurred, under a doctrine called the Cohan rule, and bank statements, calendars, and other evidence can often stand in for the paper you never kept.
That protection has a hard edge, though. For travel, gifts, and listed property, § 274(d) requires specific substantiation and does not permit a Cohan-style estimate. Knowing which of your expenses fall on which side of that line is the whole game in a no-receipts audit.
The examiner sends an information document request asking you to provide supporting records. If you cannot substantiate a deduction, the IRS may disallow it. What other evidence the law accepts to substantiate the expense matters more than whether you kept the original receipt.
Two separate bodies of law govern the answer, and confusing them is a frequent, costly mistake. The general rule for ordinary business expenses is permissive. If the evidence shows you spent something deductible, a court should approximate the amount rather than allow nothing. The rule for a specific list of expenses is the opposite: without the required proof, the deduction is gone, and no amount of credible testimony brings it back.
The Cohan rule comes from Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), where Judge Learned Hand held that where the evidence shows a taxpayer clearly incurred deductible expenses but the exact amount cannot be determined, the court should make as close an approximation as it can rather than disallow the deduction entirely.
Three limits come with it, and they matter as much as the rule.
It requires evidence that a deductible expense was incurred. The court in Cohan could estimate only because the record showed money had in fact been spent on deductible items. Without that finding, there is nothing to approximate.
The approximation may bear heavily against the taxpayer whose imprecision is his own fault. A court that estimates is entitled to estimate low, and routinely does.
It does not reach expenses governed by IRC § 274(d). This is a statutory override, not a judicial gloss.
One correction worth making plainly: the Cohan rule does not require the IRS to accept alternative evidence or to allow you a partial deduction. It is a matter of the court’s discretion when a case gets that far. An examiner is free to disallow, and often will.
IRC § 274(d) bars any deduction for three categories of expense unless you substantiate specific elements, and Treasury Regulation § 1.274-5T(a) states that this limitation supersedes the Cohan doctrine.
| Category | What it covers | Can the amount be estimated? |
|---|---|---|
| Travel away from home | Transportation, lodging, and meals while away from home overnight on business | No |
| Business gifts | Any expense for a gift to a business contact | No |
| Listed property | Property defined in IRC § 280F(d)(4), which includes passenger automobiles | No |
| Ordinary business expenses not in the three categories above | Supplies, subcontractors, rent, professional fees, materials | Yes, under the Cohan rule, if the court is satisfied the expense was incurred |
Entertainment used to be a fourth category and no longer is. The Tax Cuts and Jobs Act struck it from § 274(d) in 2017. Any page still describing the strict rule as covering “travel, entertainment, gifts and listed property” is quoting a pre-2018 version of the statute. Entertainment expenses are now largely nondeductible outright under § 274(a), regardless of substantiation.
Meals split in two. Meals eaten while traveling away from home are inside § 274(d), both because the statute says travel expenses include meals and lodging while away from home and because Treasury Regulation § 1.274-12(a)(4) expressly applies the substantiation requirement. Local business meals are different. After the 2017 changes, an ordinary local business meal is governed primarily by §§ 274(k) and 274(n), not the § 274(d) rules for travel. Substantiation still matters. Keep records showing the amount, date, business purpose, and business relationship, even without the strict § 274(d) elements.
For the § 274(d) categories, you must prove four elements: the amount, the time and place of the travel or the date and description of the gift, the business purpose, and the business relationship of the person receiving the benefit.
Treasury Regulation § 1.274-5T(c)(2) describes what satisfies that: an account book, diary, log, statement of expense, trip sheet, or similar record. Combined with documentary evidence, these are enough to establish each element. Make entries at or near the time of the expense, while you still remember the details firsthand.
A strictly contemporaneous log is not required; the regulation says so directly. Under Treasury Regulation § 1.274-5(c)(2)(iii)(A), documentary evidence is required only for lodging while traveling away from home and for any other expenditure of $75 or more, so smaller items can rest on the log alone.
If you cannot meet the adequate records standard, Treasury Regulation § 1.274-5T(c)(3) provides a fallback. You may establish an element by your own written or oral statement, in specific detail, plus other corroborative evidence. For the amount, time, place, date, and description of a gift, the corroborating evidence must be direct. Only business purpose and business relationship may be proved circumstantially. Your testimony alone is never enough.
| Evidence | What it proves | Strength |
|---|---|---|
| Bank and credit card statements | Amount, date, and payee | Strong, but does not by itself prove business purpose |
| Duplicate receipts or invoices from the vendor | All elements, same as the original | Strongest available substitute when the vendor can provide one |
| Canceled checks | Amount, date, and payee | Strong, same limits as a bank statement |
| Calendars, appointment books, and trip sheets | Time, place, and business purpose | Strong for the elements a bank statement cannot reach |
| Emails, texts, and contracts with the counterparty | Business purpose and business relationship | Strong, and often overlooked |
| Mileage logs, including reconstructions from calendar entries and map data | Business use of a vehicle | Necessary; a vehicle is listed property and cannot be estimated |
| Your own written statement | Any element | Never sufficient alone under IRC § 274(d); needs direct corroboration |
Start from the money. Bank and credit card records establish that a payment was made, to whom, and when, which is most of what an examiner needs for an ordinary business expense.
If the records were destroyed by circumstances beyond your control, such as a fire, flood, or other casualty, the regulations allow you to substantiate by a reasonable reconstruction. That is a real provision, not a courtesy, and it changes the posture of the audit considerably. Establish the loss first, with an insurance claim, a police or fire report, or a disaster declaration, and then reconstruct.
Under Tax Court Rule 142(a), the burden of proof is on the taxpayer, and a taxpayer with no records generally cannot shift that burden to the IRS.
IRC § 7491(a) can shift the burden to the IRS, but only if three conditions are met, and the first two are often a problem. The taxpayer must satisfy the Code’s substantiation requirements, maintain all required records, and cooperate with the IRS’s requests. Someone with unsupported deductions will usually struggle to meet those conditions. The shift generally does not apply to a partnership, corporation, or trust, unless the taxpayer meets the description in § 7430(c)(4)(A)(ii), subject to statutory exceptions.
Two provisions run the other way and are worth invoking when they apply. Under § 7491(b), the IRS bears the burden on an item of income reconstructed solely from statistical information about unrelated taxpayers. Under § 7491(c), the IRS bears the burden of production on any penalty against an individual, which is a real, if limited, protection.
When records are inadequate, IRC § 446(b) lets the IRS compute income by a method that, in its opinion, clearly reflects income. In practice, that means an indirect method, and the exposure shifts from your deductions to your revenue.
Recognized approaches include the bank deposits method, the source and application of funds analysis, the net worth method, percentage markup, and unit and volume analysis. Each starts from something other than your books: what went into your accounts, what you spent, what you own. They are effective, and they are also assumption-heavy, which is where they are challenged. Our page on how the IRS finds unreported income covers these in more detail.
The practical implication is that a no-receipts audit is rarely only about deductions. If an examiner concludes the books are unreliable, the IRS may use indirect methods to reconstruct income and may examine additional aspects of the return.
There’s no single fixed number. Treasury Regulation § 1.6001-1(e) sets the real standard: records must be retained so long as their contents may become material in administering the tax law, which for many items runs well past the ordinary audit window.
| Situation | Keep records for |
|---|---|
| Ordinary case, none of the below applies | 3 years |
| You filed a claim for credit or refund after filing the return | 3 years from filing the return or 2 years from paying the tax, whichever is later |
| Claim for a loss from worthless securities or a bad debt deduction | 7 years |
| You omitted income that is more than 25% of the gross income shown on the return | 6 years |
| You did not file a return | Indefinitely |
| You filed a fraudulent return | Indefinitely |
| Records establishing the basis of property you still own | Until the period runs out for the year you dispose of it |
| Employment tax records | At least 4 years after the tax is due or paid, whichever is later |
The IRS publishes this framework on its How Long Should I Keep Records page. Retention is tied to how long the IRS can still assess tax, which is the next question.
Generally, three years after the return is filed, under IRC § 6501(a). Two exceptions extend it, and two remove the limit altogether.
| Situation | Assessment period | Authority |
|---|---|---|
| General rule | 3 years after the return was filed | IRC § 6501(a) |
| Omission of more than 25% of gross income shown on the return | 6 years | IRC § 6501(e)(1)(A)(i) |
| Omission over $5,000 attributable to foreign financial assets | 6 years, with no 25% test | IRC § 6501(e)(1)(A)(ii) |
| False or fraudulent return with intent to evade tax | No limit | IRC § 6501(c)(1) |
| No return filed | No limit | IRC § 6501(c)(3) |
| Extension agreed in writing | As agreed | IRC § 6501(c)(4) |
Three refinements decide real cases. For a trade or business, gross income for the 25% test means gross receipts before subtracting the cost of goods or services, which makes the six-year period harder for the IRS to reach. An overstatement of basis now counts as an omission from gross income, a rule Congress added in 2015 to reverse a result taxpayers had won on that question. A disclosure exception in § 6501(e)(1)(B)(iii) excludes an amount from the 25% count if you disclosed it on the return or an attached statement clearly enough to apprise the IRS of its nature and amount, but that exception does not cover basis overstatements.
If an examiner asks you to sign Form 872 to extend the period, IRC § 6501(c)(4)(B) requires the IRS to tell you that you may refuse, or limit the extension to particular issues or a particular period. That is a negotiating position, not a formality.
A disallowed deduction does not automatically trigger a penalty. If an accuracy-related penalty applies, the rate is generally 20% of the underpayment. The separate civil fraud penalty is 75%, and it applies only where the IRS proves fraud, which is the wrong expectation for an ordinary substantiation failure.
| Penalty | Rate | When it applies | Authority |
|---|---|---|---|
| Accuracy-related | 20% of the underpayment | Negligence, disregard of rules, or a substantial understatement of income tax | IRC § 6662(a), (b) |
| Gross valuation misstatement | 40% | Valuation misstatements above the statutory threshold | IRC § 6662(h) |
| Civil fraud | 75% of the portion of the underpayment attributable to fraud | Fraud, which the IRS must prove by clear and convincing evidence | IRC § 6663, 7454(a) |
Negligence is defined broadly in IRC § 6662(c) as any failure to make a reasonable attempt to comply, and failing to keep records the Code requires can support a negligence finding. A substantial understatement for an individual generally means an understatement exceeding the greater of 10% of the tax required to be shown or $5,000. For a taxpayer claiming the § 199A deduction, the threshold drops to 5%.
The defense is reasonable cause and good faith under IRC § 6664(c), which looks at what you did at the time rather than what you can now prove. Losing records to a casualty, relying on a competent professional with full disclosure, and a consistent history of compliance all matter. Our chapter on IRS audit penalties covers the penalty side in more depth.
Two deadlines deserve immediate attention: thirty days from the examination report to request an Appeals conference, and ninety days from a notice of deficiency to petition the Tax Court.
The examination report arrives with a thirty-day letter. Protesting within that window takes the case to the IRS Independent Office of Appeals, which weighs the hazards of litigation in a way an examiner cannot, and which is where many substantiation disputes get resolved.
Let the thirty days lapse and the IRS issues a statutory notice of deficiency under IRC § 6212, which under IRC § 6213(a) gives you 90 days to petition the Tax Court, or 150 days if the notice is addressed to you outside the United States. Filing that petition is what lets you dispute the tax without paying it first. Our chapter on the notice of deficiency 90-day deadline covers the mechanics.
Whether that 90-day deadline can ever be extended for equitable reasons is unsettled. The Supreme Court held in Boechler, P.C. v. Commissioner, 596 U.S. 199 (2022) that the 30-day deadline for a collection due process petition is not jurisdictional and can be equitably tolled. Since then, several circuits, including the Sixth Circuit, which covers Michigan, extended that reasoning to the 90-day deficiency deadline under § 6213(a). Others, including the Eleventh Circuit, reaffirmed the deadline as jurisdictional even after Boechler, and the First Circuit took a middle position: nonjurisdictional, but not open to tolling.
If the audit already closed and you never responded, audit reconsideration is sometimes available. It asks the IRS to reconsider an assessment based on information it did not previously consider, made with a written statement or Form 12661, and it is the route for someone who found the records after the fact.
Work out which of your disallowed items are subject to strict substantiation before you spend a week gathering paper. The answer determines whether reconstruction will help you or waste your time.
Sort the challenged expenses into two piles: travel, gifts, and vehicle expenses in one, everything else in the other.
For the second pile, gather bank and card statements, canceled checks, and vendor duplicates. Ask vendors whether they can provide duplicate invoices or other records of the transaction.
For the first pile, look for records that establish time, place, and business purpose, not just amount. Calendars, appointment books, emails, and travel itineraries do the work a bank statement cannot.
If records were destroyed, document the loss before you document the expenses.
Calendar every deadline on the examination report, particularly the 30-day protest window.
Do not create records after the fact and present them as contemporaneous. A reconstruction offered honestly is allowed. A backdated log is a different problem entirely, and it is the one that turns a civil audit into something worse.
One point on who you talk to. Communications with an accountant are not automatically privileged. IRC § 7525 gives a limited privilege for tax-advice communications with a CPA or enrolled agent, but only in noncriminal matters before the IRS or federal court, and it does not cover return preparation. An attorney’s communications are protected for legal advice, and that protection can extend to an accountant working under the attorney’s direction. This matters most if the audit shifts from unsupported deductions to unreported income.
A no-receipts audit often turns on which evidence supports which expense and whether you meet the applicable deadlines. Ayar Law represents individuals and businesses in IRS and Michigan Department of Treasury audits from offices in Farmington Hills and Grand Rapids.
Call (248) 262-3400 or request a case review. Bring any letters or documentation you have regarding your IRS audit.
