Reconstruction of Tax Records - John R. Dundon II, Enrolled Agent
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Reconstruction of Tax Records

Reconstruction of Tax Records

Treasury Regulation 1.274-5 allows for a deduction without complete documentation if you can show that you have ‘substantially complied’ with adequate adequate record keeping requirements.

This statute is code for … be nice to your examiner.

Basically the practice of disallowing amounts claimed because there is no documentary evidence available to establish precise amounts beyond a reasonable doubt ignores commonly recognized business practice as well as the fact that proof may be established by credible oral testimony.  As such close approximations of items not fully supported by documentary proof can frequently be established through reliable secondary sources and collateral evidence.

It is always best practice to inform the examiner what has been reconstructed in that it builds credibility.  It’s also best to demonstrate that your expenditures are reasonable in relation to income, and that if questioned you can prove that your other financial affairs are in order. The bottom line is that tax records can be and routinely are reconstructed to serve as substantiation if under examination.

However if you are a hot head and freak out on your examiner or demonstrate any other behavior that may lead an examiner to not give you the benefit of the doubt as to the efficacy of collateral evidence you may as well just take your matter to appeals and start the process over. When it comes to reconstruction of evidence it seems to all be about demonstrating and maintaining personal credibility as a law abiding human being.  If you are not that then I suggest saving all of your receipts.



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