If you ask any accountant or tax lawyer, accurate bookkeeping is essential to filing a complete and accurate income tax return. Keeping receipts is also important in defending oneself in the event of an audit or any other court action to collect on back taxes.
Given the power and resources that the federal government has at its disposal, it seems like not keeping receipts may be a death knell to those opposing an IRS action. However, it may not.
According to a famous court case, Cohan v. Commissioner, a litigant in tax court can prove by “other credible evidence” that tax deductible expenses were incurred in the course of doing business. Cohan is based on a 1920’s case where a Broadway producer (George Cohan) challenged the IRS when it denied all of his deductions.
Essentially, the IRS continually denied Cohan’s deductions because he wasn’t able to document his expenses through receipts. Cohan regularly paid in cash and as a producer, he lived a flashy lifestyle and had a great deal of expenses that were reasonably associated with his business. Moreover, he was able to have people testify on his behalf who recounted Cohan’s expenses. A U.S. Appeals Court agreed with him, and sustained his deductions.
Of course, the IRS was not happy with this decision, but what is now called the “Cohan Rule” still stands as good law today. So if your deductions are challenged and you don’t have the receipts to back them up, you are able to use various other ways to prove your expenses.
While the preceding is not legal advice, an experienced tax law attorney can advise you if you have issues with deductions.