A taxpayer claims $18,000 of business meals and produces credit card statements at audit but no logs of attendees, business discussed, or location. Under §274, the IRS disallows the entire deduction even though the money was spent. Substantiation is not "proof I paid." It is "the specific records the Code requires."
The §6662 accuracy-related penalty is 20% of the underpayment from negligence or substantial understatement. Two paths avoid it: strong authority, or disclosure of a weaker position on the right form. Substantiation rules decide whether your records support the deduction at all.
The Cohan rule comes from a 1930 case where George M. Cohan deducted business expenses without receipts. Courts may estimate deductible amounts when the taxpayer credibly establishes that some expense was incurred. The estimate falls heavily against the taxpayer, but you do not lose the entire deduction for poor records. Cohan applies to ordinary business expenses, charitable cash contributions under $250, and similar deductions where the existence of the expense is not in doubt.
Common mistakes
- Believing receipts alone satisfy §274(d) for meals. A credit card statement shows amount and date but not who was present, what was discussed, or where. Trap: "deduct all $32,000 because there are receipts." §274(d) requires business-purpose and business-relationship too.
- Applying Cohan to meals or vehicles. "The court will estimate the deduction" is the trap. Cohan does NOT apply to §274 categories, so the full deduction is disallowed when records are inadequate.
- Confusing the disclosure forms. Form 8275 = position not contrary to a regulation. Form 8275-R = position contrary to a regulation. Trap: filing Form 8275 to disclose a position contradicting Treas. Reg. §1.162-2, the wrong form, no penalty protection.
Bottom line
- Cohan rule lets courts estimate ordinary deductions when records are weak, but §274 strictly excludes meals, travel, automobiles, gifts, entertainment
- §274(d) requires contemporaneous records of amount, time, place, business purpose, and business relationship
- Three confidence levels: reasonable basis (~20%), substantial authority (~40%), more likely than not (>50%)
- Form 8275 discloses positions not contrary to a regulation; Form 8275-R for positions contrary to a regulation
Exam shortcut
When a question gives a confidence percentage, anchor on three numbers: 20% reasonable basis, 40% substantial authority, 50% more likely than not. Substantial authority avoids §6662 silently, no form. Reasonable basis ALWAYS needs Form 8275 (or 8275-R if contrary to a regulation). For §274 categories, "I have receipts" is never enough, need amount, time, place, business purpose, AND business relationship.
The full lesson (about 2,088 words, 14 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.C2
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