IRS AUDIT? LOST RECORDS AND RECEIPTS? Don’t Lose Hope. The Cohan Rule May Be Your Hero

Posted by Michael S. Anderson | Jun 07, 2012 | 0 Comments

If you are self employed, you probably don't like the process of maintaining receipts and other proof.   Bookwork's no fun.

Many people who are self employed find it so boring to keep records, that they haven't done it for years.

The problem with this “rears” it's head in two circumstances:

1. When the returns haven't been filed and need to be re-created.

2. When a return has been filed and is being audited.

Lets look at the second problem and ask whether the small business owner can prove business expenses during the audit even if there are no receipts or even cancelled checks?

There is an old case called Cohan V. Commissioner, 39 F. 2d 540 (2d Cir. 1930) that states that the IRS will accept most expenses despite the fact that the receipts are missing.

The catch?

The business owner needs to present a reasonable basis upon which he or she recreated the expense.

So if you have very few records and you are being audited, here are two examples where this “Cohan Rule” may help you:

a. Mileage Log – This can be recreated using anything that creates a reasonable basis for the miles. A calendar along with a signed affidavit is a good example. If you keep a calendar of which job site you visited each day – this would work even though you didn't keep a mileage log.

b. Subs or employee cost – recreating what is necessary to have performed the individual jobs can form a reasonable basis for the expense. Carpet doesn't get laid by itself.

In recreating a reasonable basis for expenses it is important to understand how critical the business owner's testimony can be. If the business owner is willing to swear under oath about the expenses and how they were arrived at despite a lack of documents, that can be powerful.

So..what happens if you lose the audit because you have few records and you failed to appeal timely?

You can ask the IRS to reopen the audit to re consider the expenses. This is called an audit reconsideration.


If you own a small business and you haven't kept records, it won't devastating if an audit takes place as long you can logically estimate the expenses using some reasonable basis. Calendars, Memory, Comparables from other businesses and Affidavits will help.

If you have lost an audit but know that the IRS didn't get the numbers right, you may want to consider asking the IRS to re-open the Audit so that you can provide a “reasonable basis” for the items that were disallowed.

About the Author

Michael S. Anderson

Michael Anderson has been representing Arizona clients with tax debt problems for two decades and has helped his clients eliminate millions of dollars in tax debt. His tax debt practice is limited to helping individuals and the self-employed who have serious IRS problems.


There are no comments for this post. Be the first and Add your Comment below.

Leave a Comment


Aenean lacinia bibendum nulla sed consectetur. Donec sed odio dui. Maecenas sed diam eget risus varius blandit sit amet non magna. Nulla vitae elit libero, a pharetra augue. Curabitur blandit tempus porttitor. Morbi leo risus, porta ac consectetur ac, vestibulum at eros. Cras justo odio, dapibus ac facilisis in, egestas.

Contact Us Today

If you have an IRS problem, call our office and ask to speak with the Attorney about it. We like to discuss the situation on the phone for free to ask you some questions, answer some of yours, and to determine whether it may make sense for us to help. We’ve helped several thousand clients with tax debt problems over the last two decades. We’ll tell you the truth about your options and help you find the best one.