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How does the Cohan Rule work in practice?
PostedNovember 17, 2025
UpdatedNovember 17, 2025
ByKlemens Raab
If evidence shows expenses occurred but receipts are missing, reasonable estimates can be allowed. However, the IRS will often reduce the claimed amount (e.g., approving 80% instead of 100%).
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IRS Audits
- Why do clients get so nervous about an IRS audit?
- What are the main reasons a tax return might be selected for audit?
- What are the three main types of IRS audits?
- How should you prepare a client for an audit?
- How should you handle the relationship with the auditor?
- Why is preparation so important in an audit?
- What ethical rules should tax professionals keep in mind during an audit?
- What is a "conflict of interest" in an audit setting?
- Can the IRS request any document it wants?
- Can the IRS examine older returns beyond the three year ASED?
- What mistakes should you avoid during an audit?
- What is the first notice a taxpayer receives when the IRS starts an exam?
- What is an Information Document Request (IDR)?
- Should you only give the IRS exactly what they ask for in the IDR?
- What happens after the IRS reviews all the documents?
- How should you respond if you disagree with the IRS's proposed changes?
- What is a Notice of Deficiency, and when is it issued?
- What happens after filing a petition in U.S. Tax Court?
- What if the taxpayer misses the 90-day deadline to file in Tax Court?
- When should you use a doubt as to liability offer instead of audit reconsideration?
- How long can audit reconsideration take, and does it stop collection?
- What is the best overall strategy for preparing for an IRS exam?
- What is an IDR and why is it important?
- What is the fastest way to shut down an audit?
- When should you hold back documents from the IRS?
- Why is a retainer important before starting an exam?
- How should you fill out a Power of Attorney (Form 2848) for an audit?
- Why should you review multiple years of returns before an audit?
- What is the number one thing clients must do after hiring you for an audit?
- How can social media hurt an audit case?
- Why should you visit the client's office or home office before the audit?
- What is the issue with the QuickBooks file request?
- Should the taxpayer be interviewed by the IRS?
- Why pull a Wage and Income Transcript before the audit?
- Why is quick client cooperation critical during the audit?
- What is the key to getting a good result in an audit?
- What is the first step if a client's records are incomplete or disorganized?
- What should you do if a client claims they "have nothing" for records?
- Is paying for business expenses in cash a problem?
- What is the Cohan Rule?
- What types of expenses can't be estimated under the Cohan Rule?
- How does the Cohan Rule work in practice?
- Why is it important to separate business and personal purchases?
- What are some IRS methods for reconstructing income?
- What is the specific item method?
- How can a forensic accountant help in these situations?
- What is Form 433-A and how can it help reconstruct income?
- How was Form 433-A used in the example from the transcript?
- What if the taxpayer had a "cash hoard"?
- What is the main takeaway when client records are lacking?
- What is a correspondence audit?
- How common are correspondence audits?
- Why does the IRS use correspondence audits so often?
- What is the main drawback for taxpayers in correspondence audits?
- How much time does the IRS usually give to respond in a correspondence audit?
- What is the best first step when you receive a correspondence audit letter?
- How should you organize your response to the IRS?
- What is a "combo letter" (Letter 525)?
- What is a "pre-refund" correspondence audit?
- What common problem occurs when submitting documents in a correspondence audit?
- Can you request that a correspondence audit be transferred to a local IRS office?
- What usually happens at the end of a correspondence audit?
- Why do many taxpayers lose correspondence audit cases?
- If you lose a correspondence audit, what are your options to reopen the case?
- What is the key to improving your chances in a correspondence audit?
- What is IRS Fast Track Mediation?
- When can Fast Track Mediation be used?
- Who participates in Fast Track Mediation?
- How long does a Fast Track Mediation session last?
- Can the mediator impose a decision?
- When is Fast Track Mediation a good idea?
- What is an example of a case that worked well for Fast Track Mediation?
- When is Fast Track Mediation NOT worth pursuing?
- How can it be used in an Offer in Compromise case?
- What are the benefits of Fast Track Mediation?
- Does using Fast Track Mediation give up appeal rights?
- What form is used to request Fast Track Mediation?
- How does the process end if both sides agree?
- How quickly can it resolve a large dispute?
- What is the key to success in Fast Track Mediation?
- What is a cash-intensive business?
- Why are cash-intensive businesses audited differently?
- What are the first records an auditor will compare?
- What should you check before an audit starts?
- What is the "tax gap"?
- What are common ways owners skim cash from a business?
- What is a "zapper" program?
- How does the IRS identify unreported income in cash businesses?
- What are examples of cash-intensive businesses the IRS still targets?
- What indirect methods might the IRS use in these audits?
- What is a cash T (minimum income) analysis?
- Can the IRS summon records from third parties?
- How does the IRS use industry standards in audits?
- How should you handle an auditor who claims a business is cash-intensive when it isn't?
- What is the most important preparation tip for these audits?
- What major change happened in 2018 regarding partnership audits?
- How were partnerships audited before 2018 under TEFRA?
- Under the new BBA rules, who is responsible for paying audit underpayments?
- Why might a partnership want to opt out of the centralized audit regime?
- How can a partnership opt out of the centralized audit regime?
- Who is considered an "eligible partner" for opting out?
- What is the role of the Partnership Representative under the BBA?
- Why can the Partnership Representative role be frustrating for some partners?
- In the new regime, when is the tax underpayment assessed?
- If a partnership expects partner changes, what should they consider when filing their return?
- What is a "hobby loss" under IRS rules?
- When does the IRS conduct a hobby loss exam?
- Do hobby loss rules apply to all business types?
- Why is taxpayer intent important in a hobby loss exam?
- What is the "3 out of 5 years" rule?
- Can you still win a hobby loss case if you don't meet the profit-year presumption?
- What are the 9 factors the IRS looks at when determining of the activity is for profit or a hobby?
- What is an example of a non-business-like manner?
- What is the second factor the IRS looks at?
- How does time and effort play into the IRS's decision?
- Why does the expectation of asset appreciation matter?
- Does a taxpayer's prior success or failure in similar activities matter?
- How does a history of income or losses affect the case?
- Does the amount of occasional profit matter?
- How does financial status affect the determination?
- Does personal enjoyment of the activity mean It is a hobby?
- How many of the nine factors must be in your favor to win?
- How should a preparer handle a client with ongoing losses?
- Is a preparer required to audit their client under Circular 230?
- Why should preparers document their inquiries?
- What kind of evidence can help prove a profit motive?
- Can advertising be minimal and still count?
- What should you do before filing a return for a loss-making activity?
- What is the ultimate goal in a hobby loss exam?
- What is an "eggshell audit"?
- Why is it called an "eggshell" audit?
- What is the primary goal in an eggshell audit?
- Does the accountant-client privilege protect in criminal cases?
- What should a CPA or EA do if they suspect fraud?
- What is a Kovel accountant?
- Why shouldn't the original tax preparer be the Kovel accountant?
- What is a "dummy accountant" in this context?
- What is an "affirmative act" of fraud?
- What are some warning signs an audit may be headed toward criminal referral?
- Why is excessive copying a red flag?
- Why might an agent go silent during an audit?
- What is the U.S. v. Tweel case about?
- How has the IRS adapted to avoid another Tweel situation?
- What happens after a criminal tax conviction?
- What two code sections can penalize practitioners for wrongdoing in audits?
- Why is destroying client records a bad idea?
- How should practitioners protect themselves in an eggshell audit?
- What happens if you disagree with the results of an IRS audit?
- What is a Notice of Deficiency?
- Why might someone wait for the 90-day Notice of Deficiency before appealing?
- How fast can you get an Appeals hearing through Tax Court?
- What is IRS Appeals?
- How is an Appeals conference different from court?
- What is key to success in Appeals?
- Can you raise penalty abatement in Appeals?
- Why might you appeal issues you know you'll lose?
- When can you make a Qualified Offer?
- What happens if the IRS accepts your Qualified Offer?
- What is the main benefit of a Qualified Offer?
- What is the filing fee for U.S. Tax Court?
- How do you file in Tax Court?
- Who responds to your Tax Court petition?
- What happens if the case hasn't been to Appeals before Tax Court?
- How often do Tax Court cases actually go to trial?
- What is a stipulated decision?
- Why is settling often better than going to trial?
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