Sam Brotman, JD, LLM, MBA September 29, 2013 8 min read

IRS Audit Red Flags – Part Seven – Schedule C Expenses

IRS audit red flags - Schedule C expenses

Continued from IRS Audit Red Flags – Part Six – Employee Audit Red Flags

Claimed business meals, entertainment, and travel expenses (particularly international travel)

This one is probably a close second on the categories that are challenged by the IRS as meals, entertainment, and travel (MET) deductions are one of the most frequently used and abused deductions.

As such, high MET deductions, especially when not supported by substantial business revenue to justify the expense, will likely increase your risk of an IRS audit.

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Risk of audit

First, there is an extremely thin line between what an allowable business expense is and what is not. The test under the Internal Revenue Code is an expense that is both ordinary and necessary in the line of business.

Ordinary and necessary under the Code are two separate requirements and are terms of art among practitioners. This means that what is ordinary and necessary for one profession may not be ordinary and necessary for another and subject the latter to an IRS audit.

Auditors frequently challenge the “necessity” of entertainment expenses and often win (categories that result in a high percentage of changes usually get challenged).

In addition, many people mistakenly believe they can write off all expense associated with travel or with entertainment if it is business related.

Not true.

I have often found in my experience that meal/entertainment/travel expenses are one of the categories that taxpayers are least likely to be able to substantiate. Taxpayers either:

Think logically about meals/entertainment/travel and the profession that your expenses are associated with. Very few professions require international travel or substantial meals and entertainment expense.

Mileage and other car and truck expenses

We should start with the bad news.

If I could pick one area where my clients frequently fail to provide proper substantiation, it would be business miles. Revenue agents (and the code) requires documentation in the form of a mileage log, but I have known very few people who actually log mileage.

The worst part is because so few taxpayers keep proper mileage documentation then they usually estimate this category by using (you guessed it) numbers that end in a few zeros. The IRS has been onto mileage for years and it is one of the areas I see targeted most in an audit.

Major vehicle expenses (absent a profession that requires frequent travel) are a big target for the IRS.

However, the goods news is that is where the bad news stops.

Revenue agents will use the internet to confirm business locations, but other than a few isolated instances I have not seen too many challenge your expenses much further.

Professions with high mileage

Those professions with natural high mileage (truck drivers, real estate agents, and sales people) are also usually less likely to face strict scrutiny. Furthermore, unless the expenses appear excessive, I have not seen too many people audited solely on mileage or business use of vehicle alone.

This is most likely because many taxpayers have professions that require driving of some sort, and the IRS, absent any other audit red flags, just does not have enough resources to check everyone’s mileage log.

Just be careful when writing off car/truck expenses and mileage and, if it appears to be excessive for your profession, make sure to record a mileage log as reconstructing one later can be challenging.

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Article Index

IRS Audit Red Flags – Part One – Why IRS Audits Occur

IRS Audit Red Flags – Part Two – Common Errors

IRS Audit Red Flags – Part Three – Frequent IRS Targets

IRS Audit Red Flags – Part Four – Cash

IRS Audit Red Flags – Part Five – Schedule A and E

IRS Audit Red Flags – Part Six – Employee Audit Red Flags

IRS Audit Red Flags – Part Seven – Schedule C Expenses

IRS Audit Red Flags – Part Eight – Schedule C Losses and Schedule B and D

IRS Audit Red Flags – Part Nine – Margins

IRS Audit Red Flags – Part Ten – The Self Employed/Conclusion

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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