Quick summary

When the IRS disallows a deduction it has identified on your return, the agency will send a notice explaining the proposed change and the reason. You don’t have to accept that determination. Most successful challenges follow the same pattern: understand the notice, collect contemporaneous records that substantiate the deduction, send a clear written response, and escalate to the IRS Independent Office of Appeals or U.S. Tax Court if the issue is unresolved. This article explains practical steps, timelines, common mistakes to avoid, and when to call a tax professional.

Why deductions get disallowed

The IRS disallows deductions when the information on your return doesn’t meet statutory or regulatory rules or when documentation is missing or inconsistent. Typical reasons include:

  • Lack of adequate substantiation (no receipts, logs, invoices, or contracts).
  • Deductions that don’t meet the definition under the tax code (e.g., personal expenses claimed as business). Refer to IRS Publication 535 for business expenses and Publication 502 for medical expenses for specific rules. (See IRS publications: https://www.irs.gov/pub/irs-pdf/p535.pdf and https://www.irs.gov/pub/irs-pdf/p502.pdf)
  • Mathematical errors or entries that trigger automated adjustments.
  • Expenses that exceed limits or thresholds (for example, charitable cash contributions lacking a written acknowledgement for larger gifts—see IRS Publication 526: https://www.irs.gov/pub/irs-pdf/p526.pdf).

Understanding the specific reason on the IRS notice is critical — it dictates the evidence you need.

Step-by-step plan to challenge a disallowed deduction

  1. Read the notice carefully and calendar the deadline
  • The notice (e.g., CP2000, a statutory notice of deficiency, or an examination report) states the changes and the deadline to respond. Missing the deadline can limit options.
  1. Confirm whether the IRS adjusted your return or simply proposed a change
  • If the IRS assessed a tax change and issued a bill, you’ll respond differently than if you received a 30-day or 90-day letter offering appeal rights.
  1. Collect contemporaneous records
  • Gather original receipts, invoices, bank and credit-card statements, mileage logs, contracts, cancelled checks, photos, calendar entries, time sheets, and emails that show business purpose and timing. For travel and meals, use IRS Publication 463 as a guide: https://www.irs.gov/pub/irs-pdf/p463.pdf.
  1. Reconstruct missing records when necessary
  • If contemporaneous records were lost, you can reconstruct reasonable records using bank statements, appointment calendars, client lists, and sworn declarations detailing how amounts were calculated. Reconstructed records are less persuasive than contemporaneous documentation but often acceptable if consistent and credible.
  1. Draft a concise written response
  • Address each disallowed item separately. Attach the documents, explain the business or tax purpose, reference applicable tax rules, and include a clear statement of the relief you seek. Keep a copy of everything you send and use certified mail or the IRS contact method specified in the notice.
  1. Use the audit reconsideration or appeals process if needed
  • If the initial response doesn’t resolve the matter, you can request an audit reconsideration (if errors persist) or a formal appeal with the IRS Independent Office of Appeals. Appeals is an independent administrative office within the IRS that seeks administrative resolution without full litigation: https://www.irs.gov/appeals.
  1. Consider Tax Court when appropriate
  • If Appeals denies your position and you receive a Notice of Deficiency (a statutory notice), you generally have 90 days to file a petition with the U.S. Tax Court to contest the deficiency before paying the tax: https://www.ustaxcourt.gov/.
  1. Preserve evidence for future years

Evidence checklist (what IRS most wants to see)

How Appeals and Tax Court differ

  • IRS Appeals (administrative): Independent within the IRS, Appeals will review the case objectively and may settle without additional tax litigation. Appeals has broad settlement authority but generally expects you to present facts and law supporting your position.

  • U.S. Tax Court (judicial): Requires filing a petition, meeting strict deadlines, and (usually) legal briefing. Tax Court is appropriate when Appeals won’t resolve the dispute and you want a judicial decision. Filing in Tax Court often lets you litigate without paying the disputed tax up front (if the case arises from a Notice of Deficiency).

Use Appeals first for most issues — it’s faster and less costly than court.

Common mistakes that lead to disallowance or weaken your challenge

  • Waiting to respond or missing the proof deadline.
  • Submitting vague or incomplete documentation (e.g., a bank statement without a matching receipt and explanation).
  • Relying only on summary reports without underlying source documents.
  • Treating the IRS notice as a bill and paying the disputed amount without preserving appeal rights (paying sometimes limits certain appeal options).

Real-world examples (what works)

  • Vehicle expenses: A contractor’s deduction was initially disallowed for lack of a mileage log. We reconstructed the log using visit dates from client invoices and GPS data from a smartphone. The IRS accepted the reconstructed log and allowed a portion of the deduction.

  • Home office: A small-business owner claimed a home office and supplied floor plans, a lease agreement showing a separate office area, photographs, and a business license listing the home address. The IRS restored the deduction after reconsideration.

These examples show the value of contemporaneous records and consistent, credible reconstructions when originals are missing.

When to hire a tax professional

  • The issues are complex (large disallowed amounts, multi-year adjustments, or potential penalties).
  • You receive a Notice of Deficiency (statutory notice) where Tax Court timing and strategy matter.
  • You face penalties for negligence, substantial understatement, or fraud — these can carry monetary and criminal risks.

A qualified CPA, enrolled agent, or tax attorney can draft written protests, assemble persuasive exhibits, and represent you before the IRS and in Appeals.

Practical tips to prevent future disallowances

  • Keep contemporaneous records — contemporaneous beats reconstructed in most cases.
  • Use accounting software and back up digital receipts regularly.
  • Keep a mileage log (or use an app that exports the data) for vehicle deductions.
  • Understand the rules for specific deductions — Pub 535, Pub 463, Pub 526, and IRS home office guidance are good starting points (see IRS publications linked earlier).

Useful resources

Final note and disclaimer

In my 15 years helping taxpayers resolve disallowed deductions, timely, organized responses and credible documentation are the most common difference-makers. This article provides general informational guidance and should not be taken as personalized tax advice. For decisions about a specific IRS notice, consult a qualified tax advisor (CPA, enrolled agent, or tax attorney) who can evaluate your facts and represent you with the IRS.

References

(Professional disclaimer: This page is for educational purposes and does not create an advisor-client relationship. For advice tailored to your situation, contact a licensed tax professional.)