Another tax season is upon us. At this time of year, we get calls virtually every day from drivers. Their top question: Am I in big trouble because I don’t have receipts? (The variations to this question are, I have poor records, no records, or lost/stolen/destroyed records.) Here’s what I tell people who ask.
Okay. Let’s face it. Maybe you just didn’t keep every fuel receipt. Virtually any IRS auditor will tell you, “No receipt, no deduction.” And they usually disallow every expense that you have no receipt for.
The main thing to remember is that they may not know—or maybe they hope you don’t know—your rights regarding the documentation of expenses you have claimed, particularly business expenses. What rights are we talking about?
For an explanation, let’s go back in time over 60 years ago to a little-known, but often cited, court case that has stood the test of time.
It all started with an entertainer and songwriter named George M. Cohan. He’s the guy who wrote “Yankee Doodle Dandy” and “You’re a Grand Old Flag.” In the 1940s, it seems that Mr. Cohan’s income tax returns were audited for a year when he had traveled with his show for more than 30 of the 52 weeks. Unfortunately, Mr. Cohan had not maintained records to back up the expenses he claimed on his tax return. So the IRS examiner disallowed most of his business expenses out of hand.
Fortunately, the story doesn’t end there. He appealed the IRS’s disallowance, and, eventually, the U.S. Tax Court found in his favor. Thus, his estimated expenses were all allowed, and the “Cohan Rule” has held up since then. It has been cited in numerous cases where original records are found to be lacking or even nonexistent. What does this mean for transportation and logistics professionals everywhere?
It means that if you can reasonably estimate valid expenses for which you have no original records, it is acceptable for you to claim a deduction. The “Cohan Rule” came in very handy indeed 10 years ago for the hundreds of drivers from the New Orleans area who were left with no records after Hurricane Katrina wreaked havoc on the area.
Separate from the Cohan Rule, you may have had a situation where you actually had good records for, say, three or more consecutive months of the year. The IRS will often allow you to estimate or re-construct your expenses for the periods for which you don’t have records, if your income was relatively steady throughout the year.
Both of these remedies can make a huge difference when an auditor has initially said, “No receipt, no deduction.” While they will likely need to be brought up on appeal, they can save you from writing a 5-digit check to your least favorite government agency.
It’s situations like this that can make it worthwhile to seek out a tax firm that specializes in trucker taxes and the IRS appeal process, even if you decide to handle your own IRS audit. A word to the wise.