If you are reading this because a letter arrived, start here: missing receipts do not automatically mean losing the deduction. There is a rule for exactly this situation, it is nearly a century old, and it still works.
It also has a hole in it, and the hole sits precisely where most people need it most. That is the part worth understanding before you build your response.
Where the rule comes from
In 1930 the Second Circuit Court of Appeals decided Cohan v. Commissioner. George M. Cohan — the Broadway composer — had deducted substantial travel and entertainment expenses without keeping detailed records. The tax authority disallowed them entirely.
The court disagreed with total disallowance. It held that where it is clear a taxpayer incurred deductible expenses, refusing any deduction because the exact amount is unproven is too harsh. A court could instead make a close approximation — while, in the court's words, bearing heavily on the taxpayer whose own inexactitude created the problem.
That last clause is not decoration. Estimates made under the rule are deliberately conservative, and they are meant to be. You will not be given the benefit of the doubt.
What the rule actually gives you
Two conditions have to hold before an estimate is even considered:
- It must be clear you actually incurred a deductible expense. The rule fills a gap in the amount, not in whether the expense happened at all.
- There must be a reasonable basis for the estimate. Credible evidence pointing at a plausible figure — not a number you would like to be true.
Estimating $800 of office supplies when your statements show roughly that pattern of spending at suppliers is the territory the rule was written for. Claiming $5,000 of supplies with nothing suggesting you bought them is not an estimate; it is an overstatement, and it exposes you to accuracy-related penalties on top of the tax.
The exclusion that is the whole story
In 1962 Congress added section 274(d) to the tax code, which imposes strict substantiation requirements on specific categories and overrides the Cohan rule for them entirely. No estimate is permitted, however reasonable:
| Category | Estimates allowed? |
|---|---|
| Travel, including lodging | No |
| Meals | No |
| Business gifts | No |
| Listed property, including passenger vehicles | No |
| Office supplies, equipment, software, professional fees, most ordinary expenses | Yes, within the rule |
Look at that list against the categories people actually lose receipts for. Restaurant slips. Hotel folios. Parking. Mileage. Client gifts. The four categories where the paper is smallest, most easily lost, and most likely to fade are the four where no amount of reasonable estimation will help you.
Most articles on this subject mention the Cohan rule and stop. The exclusion is the operative fact, and it is why "I'll estimate it later if I have to" is not a workable plan for vehicle or meal expenses.
What counts as credible evidence
For expenses the rule does cover, your position is only as good as the corroboration you can assemble:
- Bank and credit card statements — amount, date, vendor
- Cancelled cheques and transfer records
- Vendor duplicates — many retailers can reprint from a card lookup or order history
- Emails — order confirmations, shipping notices, digital receipts
- Invoices you issued showing the work the expense supported
- Calendar entries and contracts establishing the business context
- Photographs of completed work, materials on site, or the item in business use
No single item here carries a deduction. Several pointing the same way can. The question an examiner is answering is whether the expense plainly occurred and whether your figure is plausible.
Vehicle expenses: the hardest case
Vehicles are listed property, so they sit squarely inside the exclusion — and vehicle deductions attract close attention because they are large, common, and easy to overstate.
A mileage log reconstructed after the fact is markedly weaker than one kept as you drove, and long gaps or suspiciously round numbers stand out. If you are rebuilding one, work from independent sources — calendar appointments, client addresses, job records, service invoices showing odometer readings — rather than estimating a weekly average and multiplying. For how the two deduction methods differ, see our Schedule C vehicle deduction guide.
The same missing receipt, two different outcomes
The exclusion is easier to see with a concrete contrast. Suppose two receipts went through the wash:
| $340 of workshop materials | $340 of client travel | |
|---|---|---|
| Category | Ordinary business expense | Travel — section 274(d) |
| Cohan rule available? | Yes | No |
| Statement showing the payment | Helps establish the expense occurred | Does not substantiate the deduction |
| Contemporaneous note of purpose | Strengthens the estimate | Part of the required record — but the underlying documentary evidence is still needed for lodging |
| Likely outcome with corroboration | A conservative estimate may be allowed | Disallowed |
Identical amount, identical carelessness, opposite results. Nothing about the second case is recoverable through better argument — the exclusion is statutory.
What it costs beyond the disallowed deduction
Losing a deduction is the first consequence, not necessarily the last. Additional tax attracts interest, and where an understatement is substantial or attributable to negligence — which can include failing to keep adequate records — an accuracy-related penalty may be added on top.
The practical implication is that recordkeeping is cheaper than it looks. The alternative is not "same tax, more admin"; it is potentially more tax, plus interest, plus a penalty.
Every situation differs, and the amounts involved here are often large enough to justify professional help. If you are facing an examination, talk to a CPA, enrolled agent, or tax attorney about your specific circumstances rather than working from general guidance.
What to do right now
- Do not ignore the notice. Deadlines in correspondence are real.
- Sort your expenses into the two buckets — those the Cohan rule can cover, and the section 274(d) four where it cannot. Your effort belongs where it can change the outcome.
- Request vendor duplicates immediately. Retailer lookup windows are limited and they close. Our store lookup guide covers the major chains.
- Pull statements and download them before you need them.
- Write down what you remember, dated today. A contemporaneous note about a reconstruction is honest and useful; a reconstruction presented as a contemporaneous record is not.
- Get professional representation if the amounts are meaningful.
If you have not yet been contacted and are reading this as a precaution, our audit preparation checklist for freelancers covers what to have ready in advance.
The version of this problem you want
The Cohan rule is a safety net with a hole in the middle of it. Travel, meals, gifts, and vehicles — the categories it excludes — are the ones most likely to go undocumented, which means the net is missing precisely where most people fall.
The alternative is unglamorous and takes seconds: photograph the receipt when you get it, note why it was business, and keep both somewhere legible and findable. ReceiptSync extracts the amount, date, and merchant automatically and keeps the image with the record, so the four elements stay intact for the full retention period. Our guide to IRS receipt requirements sets out exactly what that period is and what each record has to show.