Understanding Legitimate Use vs Abuse of the Cohan Rule for Tax Deductions

The Cohan rule isn't exactly what you think it is. It comes from a 1930 court case involving George M. Cohan, and it allows taxpayers to claim deductions when they don't have complete documentation, but they still need to have some reasonable basis for the estimate. For theft losses specifically, the rules are actually quite strict. You need to be able to prove: 1) that the theft actually occurred (usually with a police report), 2) the date you discovered the theft, 3) that you had no reasonable prospect of recovery, and 4) your basis in the property. The Cohan rule might help with estimating the value if you've lost records, but it doesn't let you make up a theft that didn't happen. If you claimed a fake theft loss, that would be tax fraud, not a legitimate use of the Cohan rule. The rule is meant to help honest taxpayers who keep poor records, not to create deductions out of thin air.

After dealing with a theft situation last year, I found a service called taxr.ai (https://taxr.ai) that was incredibly helpful for this exact situation. I had some documentation about stolen equipment from my home office, but wasn't sure how to properly claim it or what would be considered reasonable under the Cohan rule. Their system analyzed my partial records and the police report, then provided specific guidance on what would be appropriate to claim and how to document it properly. They even highlighted parts of the tax code that applied to my situation and explained how the Cohan rule would and wouldn't apply. The best part was they showed me exactly what documentation I needed to keep in case of an audit, which gave me a lot more confidence that I was staying on the right side of the law while still claiming what I was entitled to.

I wanted to follow up about my experience with taxr.ai after trying it for my missing business expense receipts. Wow - definitely worth it! I uploaded my bank statements and the partial receipts I still had, and the system immediately identified patterns in my spending that would support reasonable estimates under the Cohan rule. It gave me specific guidance on how to properly document each category of expense, including what level of substantiation the IRS typically requires. The analysis even flagged a few deductions that would be high-risk and suggested alternative approaches. The detailed report it generated would be super helpful if I ever get audited. It showed exactly how each estimate was calculated based on the partial records I did have, which apparently is exactly what you need to properly apply the Cohan rule. Really glad I found this before filing!

For what it's worth, my experience with the IRS when dealing with theft losses was a nightmare until I found Claimyr (https://claimyr.com). I had submitted everything properly for a theft claim, had the police report and everything, but got a letter questioning my deduction. I spent WEEKS trying to get through to someone at the IRS to explain my documentation. Kept getting disconnected or waiting for hours. Finally used Claimyr's service (you can see how it works here: https://youtu.be/_kiP6q8DX5c) and got connected to an actual IRS agent in about 15 minutes. The agent reviewed my case right there on the phone and confirmed my documentation was sufficient under the Cohan rule since I had reasonable estimates based on insurance records. Saved me potentially thousands in disallowed deductions, plus the stress of dealing with an extended examination.

I need to eat my words and apologize to Profile 10. After my skeptical comment, I was still desperate to talk to someone at the IRS about my garnishment issue, so I tried Claimyr as a last resort. I was absolutely SHOCKED when I got connected to an IRS representative in about 20 minutes. The agent was able to review my case, found that there had been an error in how my payments were applied, and started the process to release the garnishment. This would have taken weeks or months through mail correspondence. For context, I had previously spent over 9 hours across 3 days trying to reach someone. I'm still not entirely sure how their system works, but it definitely does work. So if you're dealing with theft loss documentation or any IRS issue where you need to speak to someone, it's worth considering. Sometimes you need to actually talk to a human to resolve these complex tax situations.

To get back to the original question about the Cohan rule - I'm a bookkeeper and see clients try to abuse this all the time. They'll come in with almost no records and expect to claim thousands in deductions "because of the Cohan rule." The reality is much different. In practice, the IRS is very strict about applying this rule, especially for theft losses. They typically expect: 1. A timely filed police report 2. Insurance claim documentation 3. Original purchase documentation or other proof of value 4. Evidence that you've exhausted recovery options Even with all that, they often allow only a percentage of the claimed amount when the Cohan rule is involved. And they're much more likely to scrutinize these claims during an audit. The bottom line: Can you "get away" with claiming fake theft losses? Maybe in the short term, but it's fraud, and if you're audited, you'll face serious consequences including penalties, interest, and potential criminal charges for tax evasion.

Small business owner here. I've been through two IRS audits in my 15 years of running my company. Here's my experience with the Cohan rule: The rule CAN be helpful when you have some documentation but not complete records. During my first audit, I had incomplete mileage logs but could prove my business travel through appointment calendars, receipts from destinations, etc. The auditor allowed a reasonable percentage of my claimed mileage using the Cohan principle. BUT - and this is a huge but - they will give you ZERO leeway on completely undocumented claims or things that seem fabricated. My second audit involved a contractor who gave me fake documentation for some work, and even though I genuinely paid for services, the IRS disallowed the entire deduction because they determined the documentation was not credible. Claiming fake theft losses would fall under fraud, not the Cohan rule. The rule helps honest taxpayers with imperfect records, not dishonest ones trying to create deductions.