One thing you can always count on during an audit is a request for documentation supporting meals and entertainment expenses. The IRS has found that these expenses are heavily abused and are an easy way to generate additional tax revenue, not to mention additional revenue from penalties and interest.
You don’t have to spend a lot of time reading tax cases to find one where meals and entertainment expenses were disallowed specifically because of improper documentation.
*Here are a few examples from recent cases:
The taxpayer’s business meal expenses did not satisfy the substantiation requirements because they did not include the taxpayer’s relationship to the parties involved or specify the business purposes of the meals.
The taxpayer’s meals and entertainment deductions were disallowed because the taxpayer couldn’t provide anything to tie the deductions to specific copies of receipts, checks, or other documents. Plus, in the few records the taxpayer did provide, there were duplications and other irregularities in the records making them unreliable altogether.
A spreadsheet listing the numbers the taxpayer put on his return was insufficient to substantiate or use to reconstruct business expenses for meals and entertainment.
This means that even if a meal or entertainment expense is perfectly legitimate, it can be disallowed if the documentation is not proper!
How to Protect Your Meals and Entertainment Expenses:
In my teachings, I dedicate an entire session to Travel, Meals and Entertainment. One of the strategies I share is how to use the IRS rules to make money on your meals and entertainment by turning your current non-deductible expenses into legal tax deductions. One of the key parts to making this strategy work is protecting your meals and entertainment deductions by keeping proper documentation.