{"id":353959,"date":"2016-04-04T10:48:03","date_gmt":"2016-04-04T15:48:03","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/tax\/federal-taxes\/non-deductible-expenses.html"},"modified":"2026-03-30T16:15:50","modified_gmt":"2026-03-30T21:15:50","slug":"non-deductible-expenses","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/tax\/federal-taxes\/non-deductible-expenses.html","title":{"rendered":"A Business Owner’s Guide to IRS Audit Red Flags"},"content":{"rendered":"\n
\n

A Business Owner's Guide to IRS Audit Red Flags<\/h1>\n\n
\n
\n By Susan Buckner, J.D.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
\n

This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
\n

The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

\n

An IRS audit involves a formal review of a business owner\u2019s business and personal accounts. The IRS will look at verifying income and legitimate business expenses to identify errors or unlawful deductions. A business owner should know the red flags that might trigger an IRS audit.<\/p>\n\n <\/div>\n\n\n\n

Sooner or later, most small business owners<\/span> can expect a tax audit<\/span>. An IRS audit<\/span><\/a> is probably the most stressful thing business owners can imagine. They might seem to come out of thin air, but your business expenses<\/span> can trigger extra scrutiny from the IRS agents reviewing your returns.<\/p>\n

Not all expenses are deductible, and not everything you spend on your business is a business expense<\/span>. Excessive deductions<\/span> will always stand out on your returns, even if they are legitimate costs. If you understand the red flags<\/span> the IRS looks for, you can better avoid catching its eye.<\/p>\n

Operating a business with high audit risks<\/span>, such as numerous cash transactions<\/span>, significant deductions, or operating at a net loss, can increase your likelihood of being audited. If you do attract the attention of an IRS auditor, you can still defend your deductions as legitimate business expenses<\/span>. The guidelines in this article will explain what business deductions to avoid and what to do if you get a Notice of Audit in the mail.<\/p>\n

Common Red Flags<\/span> That Trigger IRS Scrutiny<\/strong><\/h2>\n

Not all business expenses<\/span> are legitimate deductions<\/a>. While the internet contains many \u201chelpful\u201d tips, there\u2019s no guarantee they\u2019re either correct or legal. Some of the most common deductions have become IRS red flags<\/span> that auditors look for on your tax returns<\/span>. With proper documentation<\/span>, you can limit many of these triggers.<\/p>\n

Under the Tax Cuts and Jobs Act<\/a>\u00a0(TCJA), only self-employed<\/span> business owners can claim business deductions on their income <\/span>tax<\/span> returns<\/span>. Employees cannot claim out-of-pocket expenses as tax deductions<\/span>.<\/p>\n

Red Flag<\/span> No. 1: Home Office Deductions<\/span><\/strong><\/h3>\n

The rise of work-from-home and remote work has led to an increase in attempts to deduct daily expenses for \u201cbusiness purposes<\/span>.\u201d The home office deduction<\/span> is often misunderstood, leading to ill-advised tax declarations.<\/p>\n

A home office must meet the \u201cexclusive use\u201d test. This is a common audit trigger<\/span> that will cause IRS scrutiny. You must use the area \u201cregularly and exclusively\u201d for business purposes<\/span> only. Any personal use<\/span> invalidates the business purpose<\/span>. If you set down your laptop and turn on the TV, the space does not meet the \u201cexclusive use\u201d test.<\/p>\n

If you only use the home office for work, you can take a business deduction for the percentage of space the office uses in the house. You can deduct:<\/p>\n