Day traders, the self-employed, small business owners and others in a similar position may be more likely to be called for an Internal Revenue Service audit, because business deductions and expenses can be more difficult to quantify.
For those who work at home, the IRS may be concerned with the possibility that expenses attributed to business are actually personal. As a result, it is wise to understand some of the basics of an IRS audit.
According to one expert, basic audit terminology is a good place to start. Enrolled agent Bonnie Lee explained several of the most important terms for FOX Business. For example, "lavish" or "extravagant" are terms frequently applied to excessive meal, entertainment or travel deductions. Whether an expense is extravagant depends on the context.
If spending appears to have been essentially a vacation, it is likely to be judged inappropriate by an auditor. If it seems to have been important to closing a business deal with a major impact on the company, then it may be accepted. The context of the audited individual's or company's available funds and similar expenses may also come into account.
Opposing terms are "ordinary" and "necessary". These denote activities or items which are commonly required due to the nature of the business. Such expenses vary between industries, so restaurants, day trading firms and manufacturers might have very different lists of ordinary and necessary expenses.
These terms may only scratch the surface, but knowing them can help any individual understand that the IRS is looking for during the process. Just because an expense is questioned does not keep it from being recognized as legitimate when examined more closely.
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