Today TaxMama hears from Susan in Florida, with this issue. “If the owner of a business is able to provide bank statement, but no copies of checks, can the owner provide a written statement defining the percentage that was spent in each category? For example. 5% spent on Utilities, 30% spent on advertising, etc.”
That’s an interesting question. You’re basing the suggestion on the fact that a business has routine expenses that are ordinary and necessary. In fact, historically, there have been instances where the courts have accepted those kinds of expense outlines, under the Cohan Rule. That’s based on George M. Cohan, the entertainer, who traveled extensively as a performer. Naturally, being on the road, he didn’t cart around an extra crate just for his production company’s receipts.
So you would think preparing a schedule using estimated numbers would work, right?
Only sometimes. I have read recent court cases where the Tax Court threw out the taxpayer’s expenses because they had not made any effort to reconstruct the expenses.
In other words, if there are bank statements, the bank has check copies. Sure, they are not cheap to get. But they can be gotten. Sometimes, if a bank customer requests the checks because they are being audited, the bank will charge less. Also, if the checks were lost or destroyed due to a catastrophic disaster, the bank will help out providing the checks for free – or for a very low cost.
For routine bills, like utilities, get copies from the utility companies. You can get copies of credit card bills. You can get printouts from regular vendors.
In short, no, it’s not enough to have the bank statements and a list of estimated expenses. Don’t be lazy. Do the homework – or you’re apt to lose in an audit.
And remember, you can find answers to all kinds of questions about missing records and other tax issues, free. Where? Where else? At TaxMama.com[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
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