What is the Cohan Rule? By Thelma Sample on Dec 31, 2014 in IRS Audit |

Is the Cohan Rule a Legitimate Argument with the IRS?

With the end of the tax year on the horizon and tax time quickly approaching, your attention may start to turn to potential deductions that you can claim on this year’s return. Have you ever wondered how carefully the IRS would look for every last receipt? Well, listen closely as this information might be of interest…

What is the Cohan Rule?

George M. Cohan was a very well known Broadway star in the early 1900s (his most famous performance is Give My Regards to Broadway). Interestingly, his legacy is also closely connected to tax law. Cohan was audited by the IRS and was told that he was not allowed to deduct many of his business and entertainment related expenses because he did not keep all of the necessary receipts. Mr. Cohan appealed this ruling and the courts actually sided with him, forcing the IRS has to accept estimates of his expenses. The Cohan Rule is now a law that allows taxpayers to deduct some of their business-related expenses even if the receipts have been lost or misplaced so long as they are reasonable and credible.

How does the Cohan Rule work with the IRS?

Based on the Cohan ruling, the IRS must allow you (a business owner) to deduct some of your business expenses, even if you do not have each and every receipt to back them up. The idea is that you incur expenses as you run your business, which aren’t, can’t or weren’t always documented. Keep in mind, however, that the IRS expects that you to provide credible evidence of these expenses and while you might not have an actual receipt, you can also show pertinent records like calendar notice, canceled checks, or other notes to indicate that you are not fabricating this expense.

While the Cohan Rule allows the taxpayer to deduct some reasonable expenses even without receipts, there is a catch. If you do not have receipts, you may not be reimbursed for the full amount of your expenses. The IRS will only allow you to deduct the least amount of money that you could have possibly spent, not the entire sum.

Can you use the Cohan Rule?

If you are the subject of an audit and do not feel like the auditor is giving you credit for deductions that are legitimate (but that you do not have documentation to support), you can certainly bring up the Cohan Rule. You also have every right to appeal an audit and raise this issue in court. The IRS is not required to grant you these deductions, but it is certainly worth a try. You may find that you end up getting credit for a portion of your deductions. That’s certainly better than nothing!

Consult Success Tax Relief about whether the Cohan Rule applies to you

If you think that the IRS has not allowed you to deduct a reasonable estimate of expenses and you think that the Cohan Rule may apply to you, contact Success Tax Relief today. Our experienced tax professionals can review your documentation and help determine if you have a legitimate argument with the IRS. We have extensive experience working directly with the IRS on behalf of our clients and would be happy to help you argue your case – and take the burden off you.