As a survivor of three IRS audits where business expenses were specifically targeted, I can offer some comments from the trenches of having been there and done that. I have always done my own taxes, not used a CPA, did my own legal research on the tax code and defended my own tax returns at the audits. I won two audits outright and the third one cost me ~$80.00 (included 3 years of interest) and that was only because my Wife had a strange job as both an inside and outside sales person and the laws on deductions changed that year.
Background:
- I was an electrical engineer, working full time as such.
- For the first audit, I was attending graduate school for my MBA. That was one big reason for my return to get kicked out for audit the first time. NO expenses were reimbursed by the company and they did not support the idea of employees going for MBAs, so no letter from company to help support my claim at the IRS . . . I was totally on my own.
- For two of the tax years audited, I was also working part-time as a Special Police Officer for the town. We were supplied NOTHING in gear, NO officers were ever given practice ammo (only ammo to qualify with duty weapon 2x/year), no formal policy on off-duty carry at all (rarely practiced even today in the PRM).
I rode the commuter rail into work every day with an IRS investigator, so I tapped him for some advice on the first audit, as of course I was panic-stricken when I got the notice.
Lessons learned:
- If you have a spreadsheet of all your expenses in the category audited (do NOT bring any records not related to specific topics of audit) and give them a copy they are thrilled. Legally they are NOT entitled to a copy, but this falls into the same category of someone being stopped by the police for some small infraction . . . attitude goes a long way! They never asked to see my receipts (true in all 3 audits), but one auditor thanked me because s/he (don't recall which one) told me that s/he would have had to make a list of all the receipts if s/he didn't get the spreadsheet from me, and thus was grateful for my making the job go a lot quicker.
- I deducted everything that was related to my business expenses, gun club dues, ammo on duty gun only, mileage to/from details (we always used our own cars), uniform, equipment, etc.
- On my MBA expenses the auditor apologized and explained that she didn't have authority to approve them, that she had to get her supervisor to approve them. The supervisor came in and was quite arrogant (the auditor was quite pleasant) and said he'd deny the MBA expenses. I showed him the booklet on Misc. Business Expenses where it explained educational deductions and his answer was "I don't agree with that information", to which I responded "It's in an IRS publication. I'll see you in Tax Court" and I spun on my heel and walked away. I appealed to an IRS arbitrator, it took only a few minutes and my entire business deductions were accepted as filed.
- The message here is that if you read the IRS booklet (now online), follow their guidelines, and keep the records required for justification, you'll be in pretty good shape. Some CPAs are aggressive while others are more cautious and will recommend against certain deductions to avoid possible "red flags". Likewise you'll run into some IRS agents who can be real jerks (supervisor noted above) and some that are doing their job and being quite reasonable as long as you come across honest and have your paperwork in order.
Good luck.