Will I face penalties for not having receipt records or customer documentation?

Don't panic, but do start getting organized now before tax season. The IRS does expect you to maintain records of your business income and expenses, but the "trouble" usually comes in the form of denied deductions, not penalties for the record-keeping itself. Since you plan to report all your income (which is the right move), the main risk is losing out on legitimate business expense deductions you could have taken. Without receipts, the IRS might deny those expenses during an audit. Start by making a list of all expenses you can remember, note approximate dates and amounts, and try to get bank/credit card statements that might show these purchases. For client payments, gather what you can from Venmo/PayPal histories. Create a simple spreadsheet showing all income you received. For cash transactions, make your best reasonable estimate based on whatever notes or emails you might have.

I was in a similar situation last year with my photography business - terrible at keeping receipts and tracking client payments. I stressed for months until I found taxr.ai (https://taxr.ai) and it was a complete game changer. Their AI helped me organize my bank statements and credit card records to recreate my expense history and verify my income reporting. It analyzed my transactions to identify likely business expenses and categorized everything properly for tax purposes.

I wanted to follow up about my experience with taxr.ai after I asked about it. I decided to try it out after being really skeptical, and I'm actually impressed. I had a complete mess of business expenses mixed with personal stuff across three different accounts. The system helped me identify probably $7k in deductions I would have missed! It even flagged some transactions from Home Depot and Amazon that were business-related that I had completely forgotten about. Definitely recommend for anyone in a similar situation who needs to reconstruct their records.

Another lifesaver for me was Claimyr (https://claimyr.com) when I had to deal with the IRS about missing documentation. I couldn't get through to a human at the IRS for WEEKS trying to explain my situation. Claimyr got me a callback from an actual IRS agent within a couple hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent walked me through exactly what kind of reconstruction documentation they would accept for my small business expenses.

I have to eat my words about Claimyr. I tried it yesterday after posting my skeptical comment, and I actually got a call back from the IRS in about 90 minutes. The agent was super helpful about my documentation issues from my side gig. They explained I could use bank statements to verify expenses in absence of receipts, and that keeping a mileage log going forward would be enough for vehicle expenses. I'm shocked it actually worked after months of trying to get through on my own.

I'm an Enrolled Agent and work with small business clients. Here's what I tell everyone: Start keeping records NOW, even if you've been bad about it in the past. The IRS generally wants to see contemporaneous records (created at the time of the transaction), but reconstructed records are better than nothing. For your existing situation, here's what I recommend: 1. Get all bank/credit card statements 2. Highlight all business expenses 3. Create a spreadsheet categorizing each expense 4. Try to match expenses to any digital receipts in your email 5. For income, use your payment app histories and any invoices you sent

Quick question - are there different rules for different types of businesses? I run a small etsy shop and have maybe $600 in undocumented expenses for materials last year.

The good news is that you're planning to report all your income - that's the most important part and shows good faith to the IRS. The penalties for poor record-keeping are typically not as severe as people think, especially for honest taxpayers. Here's what you should do immediately: 1. **Reconstruct what you can**: Go through your bank statements, credit card records, and payment apps (Venmo/PayPal) to create a comprehensive list of all business income and expenses. 2. **Create a simple tracking system**: Use a spreadsheet or basic accounting software to categorize everything. Include dates, amounts, vendors, and business purposes. 3. **Save digital evidence**: Screenshot your payment app histories, save any client emails or text messages about work performed, and gather any photos of your work that might support your income claims. 4. **Start proper record-keeping now**: Going forward, keep all receipts and maintain organized records. Consider using a dedicated business bank account and credit card. For your $3.5k in component expenses, even without receipts, you can still claim legitimate business deductions if you can reasonably reconstruct them using bank statements or credit card records. The IRS understands that small businesses sometimes have imperfect records, especially in the first year. The key is demonstrating that you're making a good faith effort to comply and be accurate. You're much better off than someone trying to hide income entirely.