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What happens if the IRS disallows your business deductions?

On Behalf of | Jan 31, 2024 | Tax Law

Tax laws and forms are complicated, especially if you’re a business owner. You understand that claiming deductions is a common practice to reduce taxable income and lower tax liabilities. However, if the IRS disallows certain business deductions during an audit or review, it can have significant financial and legal ramifications.

The IRS only audits a small percentage of tax returns each year, so most people filing a 1040 have little to worry about. But if you are self-employed, your risk of an audit increases. Your Schedule C states your profit and losses. It also includes a section to record your expenses and deductions.

If the IRS conducts an audit of your business tax return, they will carefully review the claimed deductions to ensure compliance with tax laws and regulations. If they determine that certain deductions don’t meet eligibility criteria, they may disallow them, resulting in an upward adjustment of taxable income and a higher tax liability.

Additionally, the IRS may impose penalties and interest that accrued on underpaid taxes. To decrease the risk of disallowed deductions, it’s crucial to maintain thorough and accurate records of all business expenses and deductions.

The right to appeal

If the IRS audits your tax return and disallows certain business deductions, you do have the right to appeal their decision. This involves filing a Request for Appeals Review, listing the items you disagree with and your reasons for disagreeing. You may also need to present additional documentation to support your appeal.

Before starting an appeal, it’s wise to have legal guidance to help you navigate the process. This can help you prepare your documentation and seek a resolution. Having the right assistance can help ensure the best possible outcome for your situation.