It’s a common story: A family child care provider gets audited by the IRS and doesn’t have receipts for all the expenses she claimed.
When I help providers in this situation I always recommend that they try to reconstruct some of their records.
Reconstructing records can be difficult if several years have passed since the time of the expense. But, it’s not impossible.
It’s best, however, to think about reconstructing records during the same year you realize you don’t have all of them.
Keeping good records means having documents that back up your business income and expenses. IRS rules say that you should have an “adequate record” for each expense that you claim on your taxes. The ideal adequate record is a receipt for each purchase.
But what if you don’t have a receipt? Maybe you lost it or never received one. What do you do now?
You can still claim expenses on your tax return without receipts. Other adequate records may include: cancelled check, credit or debit card statements, written records you create, calendar notations, and photographs.
How to Reconstruct Records
All is not lost even if you are missing some of these records at tax time. You can take steps to reconstruct records that will be acceptable to the IRS in an audit. Here are some examples of how to do this:
Faded receipts -If your receipt is no longer readable, see my article “The Case of the Fading Receipt.”
Mileage records – If you don’t have receipts to show business trips, review your cancelled checks, credit/debit card statements, training certificates, mileage log, and calendar notations for records of trips. Photographs may show field trips with the children. Bank deposit slips or your check register will show trips to the bank. Use Mapquest or GoogleMaps to determine the miles to your destinations. See my article on how to reconstruct trips for Craigslist and garage sale purchases.
Individual items – What if you have no records at all for individual items you purchased for your business? Take a picture of each item and write down what you can remember about where you bought it, when you bought it, and how much it cost (estimate it). If it was purchased new and you know the name of the store, look up the item in the store’s online catalog and copy the catalog page.
If you purchased used toys from another child care provider, look up similar items on Craigslist or Ebay and copy the page with the advertisement on it. If you paid by check, save the check. Write the notation “toys” on the memo line of the check.
Show a pattern of spending – When you realize that you don’t have receipts or other key records, your first step should always be to start keeping better records from that day forward. This can help support your claim for expenses when your records are not complete.
For example, let’s say you weren’t keeping receipts for cleaning supplies from January – March. If you started keeping receipts in April through the end of the year, you could use your average monthly expenses for the last nine months of the year as an estimate of these expenses for the first three months.
Monthly review – Going forward, conduct a monthly review of your records so you can identify any missing records and fix the problem right away.
Minute Menu Kids Pro – If you use this software, you can go back and enter expenses from earlier in the year or for previous years. When you enter an expense without a receipt, the software allows you to make notations about the circumstances (“lost receipt”).
Try to keep careful records by saving receipts for everything! If you don’t have a receipt at tax time, take steps to reconstruct your records and claim the deduction. It’s not too late to reconstruct records even if you are audited. But don’t wait until then!
Tom Copeland – www.tomcopelandblog.com
Image credit: momitforward.com
For more informationa about how to keep records, see my Family Child Care Record Keeping Guide.