Substantiation is an underlying requirement of tax law. You’re required to maintain books and records to prove your income and deductions.
Yet in some cases, the courts can allow reasonable deductions under what’s known as the “Cohan rule.”
The rule springs from a 1930 court case involving George Cohan, a Broadway theatrical manager and producer. Mr. Cohan had no records to prove expenses he claimed on his 1920 and 1921 tax returns. The IRS–known then as the Bureau of Internal Revenue–disallowed all his expenses, since he had no proof.
Judge Learned Hand disagreed, and the Cohan rule danced into taxing lexicon. In general, it means if you have some convincing evidence that you incurred a deductible expense, the court can make an estimate of how much to allow.
Keep in mind the estimate could be–and typically is–substantially less than you might actually have spent. In addition, the Cohan rule doesn’t apply to expenses for which the tax code requires detailed receipts, such as travel (including meals and lodging while away from home), entertainment, amusement, or recreation, gifts, or certain “listed property.”