What documentation does the IRS accept to substantiate reconstructed cost basis for lost receipts?
Executive summary
The IRS’s starting rule is simple: basis is generally the cost to the taxpayer and should be supported by records, but when original receipts are lost the agency accepts reconstructed documentation drawn from third‑party and ancillary records so long as the reconstruction is “sound and reasonable” and verifiable [1] [2] [3]. Official guidance on what can be included in basis (purchase price, closing costs, commissions, capital improvements, etc.) is in Publication 551 and related IRS topic pages, and auditors will seek corroborating evidence from third parties and consistent internal records [4] [5] [1].
1. What the IRS requires: basis is proof of cost and adjustments
The IRS treats basis as the taxpayer’s investment in property and requires records that show the original cost plus items that increase or decrease basis (for example, commissions, closing costs, capital improvements, and depreciation), as laid out in Publication 551 and Topic No. 703 [4] [1]. Form 8949 instructions emphasize retaining records that show purchase price, increases to basis (improvements) and decreases (depreciation), and reporting consistent numbers when third‑party forms such as Forms 1099‑B or 1099‑S exist [2].
2. The types of documentation the IRS will accept when receipts are lost
When original receipts are missing the IRS will look to third‑party records and circumstantial evidence: bank and credit‑card statements showing the payment, broker statements and Forms 1099, closing statements and purchase contracts for real estate, lender records, and invoices or statements from sellers or service providers — all of which the IRS has cited as acceptable corroboration [6] [7] [8]. For businesses and Schedule C reconstructions the IRS’s own training materials instruct preparers to build a “sound and reasonable estimate” using partial records, summary counts, prior year returns, online mapping tools for mileage, and standard allowances where appropriate [3].
3. How third‑party and broker records function as primary evidence
Brokerage and transfer records are treated as authoritative when available: broker 1099‑B or transfer statements that report cost basis should be followed and taxpayers must report the basis shown on those forms on Form 8949, while broker-to-broker transfer rules require covered security basis to be tracked between firms [2] [9]. For property transactions the purchase contract and HUD/closing statement are classic documentary proof of original cost the IRS expects to see when available [8] [4].
4. The IRS’s verification process and practical expectations in an audit
If the IRS questions a reported basis it will attempt to verify with third parties — banks, brokers, sellers, or lenders — and will weigh the reliability of reconstructed documentation against available external records; published guides note that sometimes third‑party records are accepted “as effectively primary documents” [6] [7]. The EITC/record reconstruction training clarifies that preparers and taxpayers must be comfortable that reconstructed figures are substantially correct or be prepared to justify assumptions, and prior‑year returns or consistent business patterns strengthen a reconstruction [3].
5. Limits, caveats, and competing perspectives
Authoritative IRS publications set the boundaries but leave judgment calls: what a revenue agent deems “sound and reasonable” can vary, and non‑IRS commentary (financial sites and tax blogs) tends to reassure taxpayers that reconstructed bases are commonly accepted — especially for retirement account issues — though those sources may overstate ease of acceptance and sometimes reflect service‑provider agendas [10] [6]. Taxpayers lacking any corroborating third‑party records face greater risk; in those cases the taxpayer bears the burden to produce a credible, document‑backed reconstruction or accept IRS adjustments [2] [3].
6. Practical checklist for a defensible reconstruction
Assemble every third‑party document available — bank and credit‑card records, broker 1099s and transfer statements, closing documents, lender records, seller invoices, prior tax returns showing similar activity — explain methodology and assumptions in writing, and, where applicable, use IRS‑recognized standards like mileage rates or per‑diem amounts; these steps follow IRS guidance and IRS preparer training on record reconstruction [2] [3] [8].