Most people do not typically associate IRS audits with famed Broadway playwright George M. Cohan. However, on top of being the famed composer of ‘Yankee Doodle Dandy’ and ‘Give My Regards to Broadway’, Cohan is also famously credited as the reason an important piece of tax law was written.
Cohan, like many busy entrepreneurs, estimated many of his deductible business expenses without adequate documentation. When the IRS auditor disallowed all of Cohan’s business deductions that were not supported by receipts, Cohan tap danced to court, challenged the IRS’s requirements for strict record keeping, and won.
For tax attorneys, Cohan’s legacy is two-fold; both as the famous playwright and as the famous plaintiff in the tax case Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).
The tax law that originated in Cohan v. Commissioner became known as the “Cohan Rule” and it states that taxpayers must allow certain deductions as long as the taxpayer can show that there is a factual basis for estimating the expense.
However, the Cohan Rule doesn’t always impress the IRS or the courts. Typically, those who utilize the Cohan Rule are only allowed a small percentage of their claimed deductions. For this reason, the best way to handle an IRS audit is to hire a tax attorney who is experienced in these matters and who can appropriately argue for deductions under the Cohan Rule.
Obviously, the best way to prevent audit issues is to keep good records in the first place. Businesses and individuals should keep past tax forms, sales slips, invoices, receipts, cancelled checks, proof of payment, or brokerage statements among other documents. In particular, those with meals and entertainment or travel mileage expenses should make sure they document those items correctly.
Although it is best to keep detailed records of deductible business expenses, taxpayers can “give their regards” to George Cohan for the ability to estimate certain deductions when all else fails.
For more information regarding audits or the Cohan Rule, please contact Jeff Rogyom at Bodie.