If you’re claiming deductions for business meals, vehicle expenses, or a home office, be prepared for the IRS to scrutinize your documentation. Tax auditors are skilled at identifying incomplete or fabricated records — especially when taxpayers try to recreate logs months or even years later. The IRS has strict substantiation requirements, and a recent U.S. Tax Court case (T.C. Memo. 2024-82) offers a cautionary tale for business owners.
Real-World Example: Tax Court Disallows Multiple Deductions
In this case, the taxpayer ran a software consulting business and claimed substantial deductions over several years. The IRS disallowed many of the expenses, and the Tax Court agreed. Here’s what went wrong:
Meals and Entertainment
The taxpayer deducted nearly $9,000 in one year for “working lunches.” However, the only documentation she provided were bank statements, which do not prove the business purpose or relationship required by tax law. The court emphasized:
“The cost of eating lunch during the workday is not — without more — a deductible business expense.”
Supplies
She also deducted over $17,000 in supplies, including desks, monitors, and office equipment. Unfortunately, the receipts were dated after the tax years in question and included questionable items like soda dispensers and gift cards. The court concluded that some purchases appeared personal and none were adequately tied to the active business.
Home Office Deduction
For a home office deduction to be allowed, the space must be used exclusively and regularly for business and be the principal place of business. The taxpayer deducted over $21,000 across two years but failed to prove that the home was the focal point of her operations. She admitted to working on-site with clients much of the time and provided no floor plans or usage logs.
Other Disallowed Deductions
Additional deductions denied due to lack of proper substantiation included:
- Vehicle expenses
- Attorney fees
- Utilities
- Hotel stays
In each case, the taxpayer didn’t provide adequate records or link the expense clearly to her business.
Best Practices: How to Satisfy IRS Substantiation Requirements
To ensure your deductions withstand IRS scrutiny, follow these essential DOs and DON’Ts:
✅ DO:
- Maintain detailed records for meals, travel, and vehicle use (include date, amount, location, business purpose, and attendees).
- Use contemporaneous logs or apps to track mileage and expenses.
- Separate business and personal expenses — never use a business account for personal items.
- Retain original receipts and link them to specific business activities.
- Train employees to comply with reimbursement and reporting requirements.
❌ DON’T:
- Reconstruct logs at year-end or after receiving an IRS notice — it’s too late.
- Claim personal purchases as business expenses (even partially).
- Assume the IRS won’t ask questions — high-risk deductions are audit triggers.
What If Records Are Lost?
In rare cases, if your records are lost due to fire, theft, or disaster, the Cohan Rule may allow the IRS to estimate some deductions based on reasonable evidence. However, this is not a substitute for proper recordkeeping and should only be used as a last resort.
Stand Up to IRS Scrutiny
This case is a powerful reminder that good intentions are not enough — the IRS demands documentation. Whether you’re deducting meals, mileage, or a home office, accurate records are your best defense. Need help tightening up your tax records or developing an expense tracking process? We’re here to help you stay compliant and keep your deductions intact.