Overview

An IRS examination of business expense deductions reviews whether the expenses a business claimed on its tax return are legitimate, ordinary and necessary for the trade or business, and supported by adequate records. Examinations can begin as a correspondence request (paper audit), an office audit, or a field audit. The IRS may accept your records as presented, propose adjustments, or assess additional tax, penalties, and interest.

This guide explains the typical timeline, what documentation the IRS will want, how to respond, and practical steps to reduce audit risk. It draws on IRS guidance (see IRS Publication 535 and the Small Business & Self-Employed recordkeeping pages) and common practice from working with small businesses and tax professionals.

Sources: IRS Publication 535: Business Expenses (https://www.irs.gov/forms-pubs/about-publication-535) and the IRS Small Business Recordkeeping page (https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping).

Types of examinations you may face

  • Correspondence (mail) audit: The IRS requests specific documents by mail. This is the most common and usually the quickest type.
  • Office audit: You and/or your representative meet an IRS examiner at a local IRS office to review records.
  • Field audit: An IRS agent visits your business or accountant’s office to inspect books and interview staff. Field audits are more detailed and can take longer.

Many disputes begin as correspondence audits; complex issues (employee vs. contractor classification, substantial travel and meals, or large home-office or advertising claims) can trigger in-person reviews.

What triggers an examination?

The IRS does not disclose all selection methods, but typical triggers include:

  • High deductions relative to reported income.
  • Large or unusual one-time expenses.
  • Repeated losses reported over multiple years.
  • Mismatches between third-party forms (1099s, W-2s) and your return.
  • Specific deduction categories the IRS often examines, such as home office, travel, meals, vehicle, and advertising expenses.

See our guide on common triggers: What Triggers an IRS Audit: Red Flags to Watch (https://finhelp.io/glossary/what-triggers-an-irs-audit-red-flags-to-watch/).

What the IRS will ask for — documentation checklist

Successful examinations hinge on documentation. Typical items examiners request:

  • General ledger and trial balance for the tax year under review.
  • Invoices, receipts, purchase orders, and bank/credit-card statements.
  • Canceled checks and vendor contracts.
  • Time logs and contemporaneous records for travel and vehicle use (mileage logs showing date, miles, business purpose) — see IRS Publication 463 for requirements (https://www.irs.gov/publications/p463).
  • Documentation for home-office claims: floor plan, square footage calculations, utility bills, lease or mortgage records; see IRS Publication 587 (https://www.irs.gov/publications/p587).
  • Payroll records when deductions involve employee expenses.
  • Advertising and marketing invoices showing business purpose and medium.

For a practical, itemized list tailored to in-person reviews, refer to our documentation checklist for field audits: Preparing for an IRS Field Audit: Documentation Checklist for Small Businesses (https://finhelp.io/glossary/preparing-for-an-irs-field-audit-documentation-checklist-for-small-businesses/).

How the examiner evaluates deductions

Examiners apply three primary tests:

  1. Ordinary and necessary: Was the expense common and accepted in your trade or business and helpful to your business? (IRS Pub 535).
  2. Substantiation: Can you prove the expense with reliable records? Contemporaneous documentation is stronger than reconstructing records later.
  3. Allocation: If an expense is part business/part personal (meals, vehicle, home), can you reasonably separate the business portion?

If you meet the tests, deductions are usually allowed. If documentation is weak, the IRS may disallow part or all of the deduction and propose an adjustment.

Typical audit outcomes and timeframes

  • Correspondence audits: Often resolved in 30–90 days after documents are submitted.
  • Office audits: May take weeks to months depending on complexity and follow-up requests.
  • Field audits: Can last months and sometimes more than a year if multiple tax years are under review or complex transactions are involved.

The IRS generally has three years from the date you filed the return to assess additional tax. That period extends to six years if you omit more than 25% of your gross income (IRS statute of limitations guidance) (https://www.irs.gov/filing/when-to-file).

Common problem areas the IRS focuses on

  • Travel and lodging: Lack of business purpose documentation and mixed personal travel.
  • Meals and entertainment: Misstating business purpose or failing to allocate personal portions. Generally, business meals are 50% deductible — consult Publication 463 for details (https://www.irs.gov/publications/p463).
  • Home office: Improper allocation of space or lack of exclusive-use proof (see Publication 587).
  • Vehicle expenses: Missing mileage logs or using inconsistent methods.
  • Advertising and contractor payments: Missing contracts, invoices, or 1099 reporting issues.

How to prepare before and during an examination

  1. Review the notice carefully: Identify the tax year, the items under review, and the response deadline. Don’t ignore it.
  2. Gather records chronologically and create a concise cover memo explaining each category and the business purpose. Examiners appreciate clear, organized packets.
  3. Reconstruct missing records only when necessary and document how you reconstructed them.
  4. If unfamiliar with audit procedures or if the potential adjustment is large, hire a tax professional (CPA or enrolled agent). Using a representative is often the most efficient path — see our page about using Form 2848 for representation (https://finhelp.io/glossary/using-a-power-of-attorney-form-2848-during-an-audit-or-appeal/).
  5. Meet deadlines and respond in writing. Keep copies of everything you send.

In my practice, a one-page summary with columned totals (expense category, amount claimed, records provided, and business purpose) has repeatedly shortened examination time and reduced follow-ups.

Substantiation techniques that stand up to scrutiny

  • Use contemporaneous logs for mileage and travel: date, miles, starting point, destination, business purpose, and attendees.
  • Scan and back up all receipts and invoices with searchable file names and a cross-reference index tied to your accounting ledger.
  • For recurring services (e.g., advertising, software subscriptions), keep contracts and proof of delivery or publication when applicable.
  • Use payroll reports and timesheets for employee-related expenses.

See our practical advice on recordkeeping for taxes: Recordkeeping for Taxes: Documents to Keep and How Long (https://finhelp.io/glossary/recordkeeping-for-taxes-documents-to-keep-and-how-long/).

When you disagree with the IRS

  • Ask for a conference with the examiner’s manager if you believe the examiner misinterpreted facts.
  • If the IRS proposes changes you don’t accept, you can request an appeals conference with the IRS Office of Appeals.
  • If appeals don’t resolve the issue, you may be able to petition the U.S. Tax Court or consider other remedies; consult a tax attorney or trusted advisor.

Penalties and interest

If deductions are disallowed and tax is assessed, the IRS generally charges interest on unpaid tax from the original due date. Penalties may apply if the IRS concludes there was negligence, substantial understatement, or fraud. Reasonable cause documentation can reduce or avoid penalties; keep careful records and consult a professional if penalties are proposed.

Practical record-retention rules (quick reference)

  • Keep records for at least three years from the date you filed the return in most cases.
  • Keep records for six years if you omit more than 25% of gross income.
  • Keep employment tax records for at least four years after the date the tax becomes due or is paid.
  • Keep records for property until the period of limitations expires for the year in which you dispose of the property.

Refer to IRS recordkeeping guidance for specifics and exceptions (IRS Small Business & Self-Employed: Recordkeeping).

Final checklist before submitting documents

  • Does each expense have a date, amount, vendor, and business purpose?
  • Are mixed expenses clearly allocated between business and personal?
  • Are logs contemporaneous or accompanied by an explanation of reconstruction?
  • Have you included a concise cover memo that ties records to the return line items?

Closing notes and disclaimer

Being organized, transparent, and timely are the most effective defenses during an examination of business expense deductions. Good recordkeeping not only helps in audits but improves financial control and tax planning.

This article is educational and not a substitute for personalized tax advice. For case-specific guidance, consult a CPA, enrolled agent, or tax attorney. IRS publications cited include Publication 535 (Business Expenses) and Publication 463 (Travel, Entertainment, Gift, and Car Expenses) and the Small Business & Self-Employed Recordkeeping pages (links above).