The IRS is auditing more people who deduct employee business expenses. If you work for someone and deduct work expenses, then this report is for you.
If you are called in for an audit, do you know how to defend yourself? Many people go into an IRS audit with confidence, believing that their receipts will allow their tax deductions. But when the auditor is done with them, ALL of their work expenses are denied.
So, where did they go wrong?
Answer: They didn’t know what makes a work expense deductible.
The two main things that make a work expense deductible are:
- The expense must be for the benefit of your employer, or for a skill that is required for your employment; and
Your employer will not reimburse the expense.
- During an audit, the IRS will review your company’s Reimbursement Policy. If it learns that you would have reimbursed had you submitted an expense report, then your deduction will be denied.
The IRS keeps a list of large companies that have an official Reimbursement Policy. If you are employed by one of them and deduct work expenses, then you have a high chance of being audited.
The IRS makes the assumption that if your employer didn’t reimburse you, then the expense must not be related to your job. It is up to you to prove otherwise.
There are strategies to minimize the damage. If we were representing you in the audit, we would review your employer’s Reimbursement Policy for limitations. Most companies do NOT reimburse ALL expenses and often the mileage reimbursement is less than the allowable IRS rate. We would argue that any expenses in excess of what your employer would have reimbursed should be allowed.
In order to win an audit of work-related expenses, you must not only keep your receipts, but you should also record specifically why the expenses were necessary to perform your job. The extra steps of keeping good records will help, if and when you are audited.