Most people understand that it is recommended to hang onto receipts associated with your tax deductions, but they may not grasp the importance of doing so. If you lose your tax receipts, it could have some significant consequences for your tax return. You may end up paying more than you should in taxes because of it.
Not Being Audited
The purpose of keeping receipts is so you have some kind of proof that you actually incurred a tax-deductible expense. If you do not have the receipt, you do not have proof of the expense. However, unless you are audited, the Internal Revenue Service will never know that you lost the receipt. When you file your tax return, you do not include copies of the receipts for the IRS. Instead, you simply list the deduction on your tax return.
If you lose your receipts and the IRS chooses your tax return for an audit, this can lead to some problems. When you are audited, the adjuster contacts you and asks for proof of expenses. If you do not have receipts, the adjuster may ask for some other way to prove the expenses. For example, printing out a copy of your online bank statement may suffice, depending on the adjuster.
If you do not have the appropriate receipts on hand, the adjuster may choose to disallow certain deductions, as in, you do not get to take them. As a result, your taxable income increases compared to what you calculated, as does your tax liability. Because of the lost receipts, you may end up paying more taxes than you originally calculated.
The Internal Revenue Service does not require you to keep receipts for every expense. In some cases, keeping a log book accomplishes the same goal. For example, if you need to track business travel expenses, keeping a log book suffices. With a log book, you simply keep a notebook with all of the details of each transaction. Write down where you spent money, how much you spent and for what purpose. If you are audited, the auditor looks at the log book instead of requesting receipts.