This is general guidance, not personalised tax advice. Audit procedures and rules change — check irs.gov or a tax professional if you're actually facing one.

Self-employed contractors filing a Schedule C are statistically more likely to be audited than a typical W-2 employee, particularly cash-intensive trades where the IRS's data suggests income is more often underreported relative to expenses claimed. Returns are scored by an internal formula (the Discriminant Information Function, or DIF score) that flags entries statistically out of line with similar returns — an unusually high deduction relative to reported income is a common trigger.

How an audit actually starts

Most start with a letter — either a correspondence audit requesting documentation for specific items by mail, or, less commonly for most self-employed contractors, a request for an in-person or field audit covering a broader set of records. There's a response deadline, and not responding results in the disputed items being adjusted based on what the IRS already has, which is rarely in your favor.

What "no receipts" actually costs you

Courts have historically allowed a taxpayer to claim a reasonable estimate of an expense even without a receipt, under what's known as the Cohan rule — but it's far less reliable than it sounds, and Congress specifically carved out an exception for vehicle, travel, meals and entertainment expenses, which require strict contemporaneous substantiation and can't rely on the Cohan rule at all. For a trade that runs heavily on vehicle mileage between job sites, that carve-out matters enormously — a reconstructed, after-the-fact mileage estimate is a common reason vehicle expense claims get disallowed outright.

How the IRS reconstructs income without your records

Where records are genuinely inadequate, the IRS doesn't have to accept your reported figures — it can use indirect methods like the bank deposits method, treating unexplained deposits as income unless proven otherwise. This shifts the burden onto you to prove a deposit wasn't taxable income, which is a much harder position than simply having the records to support what you originally reported.

How penalties scale

Beyond the additional tax and interest on disallowed deductions, an accuracy-related penalty generally applies to an underpayment caused by negligence or a substantial understatement of tax, and a much higher civil fraud penalty applies where the underpayment is due to actual fraud. Voluntarily correcting an error through an amended return before being contacted is treated very differently from the same issue being found during an audit.

How far back they can go

The standard statute of limitations is generally three years from filing, extending to six years where income is substantially understated, and there's no limit at all in cases of fraud or a return that was never filed. A genuine, honest gap in the records is a very different exposure than one that looks deliberate or ongoing.

What actually protects you

  • Digital records that survive — a photo in a camera roll that's since been deleted, or a receipt faded blank in a truck glovebox, is functionally the same as never having kept it.
  • A genuine, contemporaneous mileage log — reconstructed after the fact is exactly what the Cohan carve-out is designed to catch.
  • Records tied to a specific job, not just a bank statement — a bank statement shows money left your account, not what it was for or that it was genuinely business-related.

How Site Wallet helps here

Every receipt scanned is dated, itemized, tagged to a job and kept encrypted for as long as you need it — not dependent on a truck glovebox or a phone's camera roll surviving three to seven years. If an audit ever lands, a full export by tax year is a few taps, not a search through paperwork that may not exist any more.

FAQ

How likely is an audit, realistically?

Higher than for a typical W-2 employee, particularly for cash-intensive trades — not a reason for alarm, but a reason to treat good records as routine rather than optional.

Can I rely on the Cohan rule if I lose receipts?

Not reliably, and not at all for vehicle, travel and meal expenses specifically — it's a fallback courts have allowed in some cases, not a substitute for keeping records in the first place.

What should I do the moment I realise records are missing?

Talk to a tax professional about filing an amended return to correct it before being contacted — coming forward first is treated far more favorably than the same issue found during an audit.