The general rule, when dealing with the IRS, is that taxpayers must be able to substantiate all deductions. The burden of proof falls on the taxpayer. Under certain circumstances, a court may waive this requirement and allow the use of a deduction estimate. The U.S. Court of Appeals for the Second Circuit in the case of G.M. Cohan established that under certain circumstances, a deduction estimate may be used.
George M. Cohan was a 1920′s theatrical figure who wrote the song “Yankee Doodle Dandy.” Mr. Cohan was audited and unable to produce receipts that showed the actual amount he spent for certain business expenses, such as travel expenses. The IRS disallowed his deductions but in the end the Appeals Court allowed him to prove his deductions based on testimony and approximations of the amounts incurred.
Use Of A Deduction Estimate – The “Cohan Rule”
This rule is known as the Cohan Rule. However, acceptance of the Cohan Rule approximations is always discretionary with a court; a taxpayer is not automatically entitled to make an approximation in a tax matter. For this rule to apply, the taxpayer must convince the court by oral and/or written statements that:
- Expenses were incurred, and that
- There is a reasonable basis for the deduction estimate
Expect a compromise, rather than a full allowance of the approximated expenses.
In short, taxpayers may use deduction estimates when they can show that there is some factual foundation on which to base a reasonable approximation of the expense. However, it is crucial to keep in mind, that you can expect the IRS to put up a fight as to the proper amount of the allowable expense, so it is always a best practice to retain documentation to substantiate your deductions.
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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
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