How Can I Protect My Business Expense Deductions from IRS Audits?
- Steve Julal
- Jul 18
- 2 min read
If you plan to deduct business meals, vehicle use, or other common expenses, it is important to note that the IRS may examine these deductions closely. Taxpayers sometimes fail to maintain adequate records or attempt to reconstruct documentation after the fact, which does not meet IRS substantiation requirements. The following summary of U.S. Tax Court Case (T.C. Memo. 2024-82) provides relevant context.
U.S. Tax Court Case (T.C. Memo. 2024-82): Deductions Denied
In this case, the taxpayer operated a software consulting business and reported significant deductions over multiple years. Following an audit, the IRS disallowed several deductions, with the Tax Court supporting these decisions. Specific issues identified included:
1. Meals and Entertainment
Nearly $9,000 was deducted for “working lunches,” supported solely by bank statements. The court determined that these statements did not establish a valid business purpose or specify participants, and a lunch during the workday was not automatically considered deductible without additional evidence.
2. Supplies
Claims exceeded $17,000 in supply costs over two years; most receipts were dated after business operations had ceased and some involved purchases such as soda dispensers and gift cards, which the court found to be personal or unrelated to the business.
3. Home Office
Over $21,000 was deducted for home office expenses, but the taxpayer could not demonstrate that the home was the principal place of business. Testimony indicated work was often conducted at client sites, and there was no proof of exclusive business use within the home.
Other deductions (such as legal fees, hotel stays, utilities, and vehicle expenses) were also denied due to insufficient documentation or lack of a direct connection to business activities.
Tips to Maintain Compliance
To reduce the likelihood of similar issues, consider the following practices:
DO:
Maintain comprehensive records for all expenses, particularly for meals and vehicle-related costs.
Document the amount, date, business purpose, and individuals involved for each expense.
Require regular submission of employee expense reports and ensure adherence to IRS standards.
Separate business and personal accounts.
DON’T:
Delay tracking expenses or attempt to recreate documentation retrospectively.
Mix business and personal expenditures, as this can create confusion during audits.
Assume substantiation will not be requested by the IRS, as deductions for meals, travel, vehicle use, and home offices are frequently reviewed.
Documenting Deductions
Accurate recordkeeping is essential for supporting deductions. Organized records and, when necessary, advice from tax professionals can help ensure compliance with IRS requirements. If documentation is lost due to unforeseen circumstances, courts may allow reasonable estimates based on the "Cohan rule." However, comprehensive documentation remains the primary means of substantiating deductions.
For those undergoing an IRS review or seeking assistance with compliance, consulting your VAAS Tax Professional will help clarify applicable requirements and procedures.
