When The IRS Wants Records

June 1, 2017

While the number of audits was down again in 2016, the Internal Revenue Service nevertheless audited somewhat more than 1 million individual tax returns last year, the lowest amount since 2004. Citing reductions in the number of auditors available due to budget cuts, the IRS indicates the number of audits declined 16 percent from 2015, marking the sixth straight year of declines. All that sounds great, unless you are one of those being audited. And if being audited isn’t bad enough, what do you do when the IRS wants records you no longer have on file? Here are several pointers.

Pointer 1: Try to Stay Calm: Panic Won’t Help

It might be easier said than done, but try not to panic. True, tax regulations are clear: The unavailability of a taxpayer’s records does not relieve the taxpayer of the burden of demonstrating his or her entitlement to deductions claimed. Yet, under the so-called “Cohan rule,” taxpayers can prove their deductions and other tax matters by “other credible evidence.” Moreover, if the records were lost due to circumstances beyond the control of the taxpayer, the taxpayer has the right to a deduction based on a “reasonable reconstruction” of his or her expenditures.

Pointer 2: Be Truthful

Recognize that the IRS has heard every excuse in the book. If your only defense is something along the lines of “the dog ate my tax records,” you won’t get far.  Don’t volunteer too much information. But never lie to the IRS, most particularly about “large ticket” items, such as the purchase of equipment.  In the case of a business, or the expenditure of funds for other legitimate deductions, it may be relatively easy to reconstruct the record. Bear in mind, also, that when the IRS wants records you no longer have, the other party to the transaction likely kept documents about the transaction. Obtaining copies of relevant materials from that party could help you prove you’re entitled to the deduction or tax credit. Charities, for example, must keep records of any significant donation. They are usually more than happy to provide copies of their acknowledgements.

Your bank will also have records of your transactions going back at least several years. There may be a charge to get copies of cancelled checks and other banking materials, but such banking records can often underpin a deduction.

Pointer 3: The IRS is More Lenient When It Comes to Loss of Records Due to Disasters

The IRS recognizes that some losses are beyond the power and control of the taxpayer. If, for example, records were lost due to a natural disaster, the IRS is usually more lenient with the taxpayer. You’ll still need to make a serious effort to reconstruct your records, but the IRS has an excellent publication, that discusses how to reconstruct your records in the event of a loss from a disaster.

Pointer 4:  Use Common Sense

When the IRS wants records and you’re faced with a reconstruction project, use your common sense. That is, “don’t sweat the small stuff.” It doesn’t make much sense wasting 10 to 20 hours trying to reconstruct a $50 deduction. The deduction, if allowed, will only produce a fraction of that amount—say $15—in tax savings. Sometimes it just makes more sense to move on to something more significant.

Pointer 5: Seek Expert Advice

Many taxpayers find that it’s best to seek expert advice if significant tax records have been discarded, lost, or destroyed. While there’s a cost involved, the peace of mind that comes from knowing the matter is being handled by a competent professional is usually worth it. The IRS has experts. Shouldn’t you have one as well?

Mackay, Caswell & Callahan, P.C.: Experienced, Caring Tax Attorneys

Have you received an audit notice from the IRS? Do you know what to do if the IRS wants records and yours are incomplete? Do you have other tax questions? If so, contact one of the Upstate New York tax attorneys or New York City tax attorneys at Mackay, Caswell & Callahan, P.C. today. We have more than 30 years of experience assisting taxpayers with all sorts of tax-related issues. We have offices in Albany, New York City, Rochester, Syracuse, Utica and Watertown. Don’t delay; we have a New York tax attorney ready to help you with your tax issues.

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