IRS audits of business travel, meals and entertainment expenses

Deductions for business travel, meals and entertainment expenses have become so problematic for some taxpayers lately that I added this page of position statement that the IRS will take in an audit. Taxpayers mistakenly presume that their “pretty good” records will meet the strict IRS standards established to allow business travel, meals and entertainment expenses. Instead, IRS may disallow the taxpayer’s entire deduction and add penalties and interest to the amount of tax due. The statement below is taken word-for-word from an actual IRS audit response letter except that I added the bold font to certain sections.

Business Travel, Meals & Entertainment Expenses

Substantiation Requirements for Business Expenses

In order to claim any deduction, a taxpayer must be able to prove, if the return is audited, that the expenses were in fact paid or incurred. The following expenses, which are deemed particularly susceptible to abuse, must generally be substantiated by adequate records or sufficient evidence corroborating the taxpayer’s own statement: expenses with respect to travel away from home (including meals and lodging), entertainment expenses, business gifts, and expenses in connection with the use of listed property such as cars and computers – Sec. 274(d); Temp. Reg.

§ l .274-5T. The expenses must be substantiated as to amount, time, place, and business purpose. For entertainment and gift expenses, the business relationship of the person being entertained or receiving the gift must also be substantiated.

The Cohan rule, which allows the comts to estimate the amount of a taxpayer’s expenses when adequate records do not exist, does not apply for the expenses covered by the substantiation rules of Sec. 274(d) – Temp. Reg.§ l .274-5T(a)(l).