How can you effectively handle IRS questions about your expense report deductions?

If you travel or entertain clients for your business, you may be able to deduct some of your expenses from your taxable income. However, the IRS may have questions about your expense report deductions and ask you to provide documentation or explanation. How can you effectively handle IRS questions about your expense report deductions and avoid penalties or audits? Here are some tips to help you.

1 Know the rules

The first step to handle IRS questions is to know the rules and requirements for deducting business expenses. The IRS has specific criteria for what counts as a business expense, how much you can deduct, and what records you need to keep. For example, you can only deduct 50% of your meals and entertainment expenses, and you need to have receipts, invoices, or other proof of payment. You also need to show the business purpose, date, location, and amount of each expense. You can find more information on the IRS website or consult a tax professional.

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Joseph L. Rosenberg

CPA-Owner, Joseph L. Rosenberg CPA
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Actually, while you can deduct 50% of your meals expenses, you have not been able to deduct any entertainment expenses for a few years. And make sure you review your state rules on meals. New Jersey, for example allows you to deduct the full 100% of meals.

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Tabassum Ali

Owner of Tax Tabs And Author at Accounting Today
(edited)
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Expenses must meet following criteria. A-Are they necessary ? B- Are they reasonable ? Depending of circumstances traveling from NY to CA may be necessary for a small business owner , but traveling business class is not reasonable.

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CA Mohit Loonkar

ACA in practice 📟 | Tax Consultant | Financial & Tax Planning Specialist | FAFD 💻 | Bookkeeping | US Taxation | M.Com 📚
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Maintain Detailed Records: Keep thorough and organized records of all your expenses. This includes receipts, invoices, and any other supporting documentation. Make sure the documentation is clear and easily understandable. Understand Tax Laws: Stay informed about the tax laws relevant to your situation. The IRS provides publications and guidelines that can help you understand what expenses are deductible and what documentation is required. Be Honest and Accurate: Ensure that your expense report is accurate and honest. Any attempt to deceive the IRS can lead to serious consequences, including penalties and fines.

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Yvette D. Best, MBA, EA, CTC

The IRS Problem Solver | Tax reduction for travel, insurance, and real estate agents | Grew 7-figure firms <24 months
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When responding to IRS questions about business expenses, here’s a detailed strategy: 1. The foundation of effectively answering IRS questions lies in keeping meticulous records. 2. Present your information in an organized manner. 3. Ensure the expenses you are claiming are legitimately business-related. 4. Provide direct and honest responses. 5. Be clear and concise with explanations. 6. Seek assistance from a tax professional, if too complex. 7. Adher to reply deadlines in the IRS letters. It's crucial. 8. Read and understand the Taypayer Bill's of Rights. 9. Keep copies of all documents sent to the IRS and send them via certified mail. 10. Stay calm and professional always when speaking to IRS employees.

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2 Respond promptly and politely

If the IRS contacts you by mail, phone, or email, you should respond promptly and politely. Ignoring or delaying your response can lead to more questions, penalties, or audits. You should also be respectful and courteous, and avoid arguing or being defensive. The IRS is not your enemy, but they have a job to do and they need your cooperation. You should also keep a record of all your communications with the IRS, including the date, time, name, and ID of the person you spoke to.

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Harold Blotcher, EA

Enrolled Agent, Experienced Tax Professional making sure you pay least amount of taxes allowed by law 781-363-5519
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This is incorrect. The IRS will not contact you by phone or email. If you get a call do not provide any information. HANG UP. if you get an email claiming to be from the IRS do not open any attachments or click on any links. DELETE the email.

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3 Provide accurate and complete information

When you respond to IRS questions, you should provide accurate and complete information that supports your expense report deductions. You should not guess, lie, or omit any details that are relevant to your expenses. You should also not provide more information than necessary or volunteer information that is not requested. The IRS may ask you to send copies of your receipts, invoices, bank statements, calendars, or other documents that show your expenses and their business purpose. You should make sure these documents are clear, legible, and organized.

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4 Seek professional help if needed

If you are not sure how to handle IRS questions, or if you face a complex or serious issue, you may want to seek professional help from a tax attorney, accountant, or enrolled agent. These professionals can help you understand your rights and responsibilities, communicate with the IRS on your behalf, negotiate a settlement or payment plan, or represent you in an audit or appeal. They can also help you avoid or reduce penalties, interest, or additional taxes.

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5 Review and improve your expense reporting system

After you handle IRS questions, you should review and improve your expense reporting system to avoid future problems. You should make sure you have a clear and consistent policy for your business expenses, and that you follow it. You should also use a reliable and secure software or app to track and record your expenses, and to generate reports that comply with IRS rules. You should also review your expenses regularly and make adjustments as needed.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you effectively handle IRS questions about your expense report deductions?

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1 Know the rules

2 Respond promptly and politely

3 Provide accurate and complete information

4 Seek professional help if needed

5 Review and improve your expense reporting system

6 Here’s what else to consider

Financial Management

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