Does This Tax Deduction Increase Your Risk of an IRS Audit?
At Freedom Tax & Business Services, we want you to maximize your tax savings—but we also want your filing to be safe, audit-proof, and worry-free. One deduction in particular often raises red flags with the IRS. Below, we explain what that deduction is, why it can trigger an audit, and how to claim it correctly so you stay compliant.
🔍 The Home-Office Deduction: High Reward, High Scrutiny
One of the most scrutinized deductions the IRS watches closely is the home-office deduction. Many self-employed individuals, small business owners, and independent contractors take this deduction to offset expenses for the portion of their home used regularly and exclusively for business.
The problem? Because it’s relatively easy to overestimate or misapply, the home-office deduction is a common audit trigger. When taxpayers claim large home-office deductions (especially if the deduction is large compared to their income), the IRS tends to take notice.
⚠️ What IRS Looks For (Audit Risk Factors)
Here are key “red flags” that often accompany home-office deduction claims—and increase IRS audit risk:
Size of deduction relative to income: Claiming a home-office deduction that seems unusually large for your income level tends to draw scrutiny.
Exclusive and regular business use: The space must be used only for business, regularly. If part of it is used as a gym, family room, or for nonbusiness purposes, it doesn’t meet IRS rules.
Primary place of business: The area claimed must be your principal place for conducting business. If you have another location where you primarily conduct business or meet clients, this requirement might not be met.
Poor documentation: No receipts or missing supporting records for utilities, repairs, depreciation, etc., raises red flags.
✅ How To Use the Home-Office Deduction Safely
If you qualify and want to take the home-office deduction, here are best practices to reduce your IRS audit risk:
Ensure the space is exclusive & regular – Use that part of your home only for business and do so regularly.
Calculate accurately – Measure correctly and apply allowable proportions of mortgage interest, utilities, repairs, depreciation, etc.
Maintain detailed documentation – Keep receipts, logs, pictures, utility bills, etc., that support your claim.
Use it in context – If your home office deduction is large relative to your overall income or business expenses, double check you aren’t overclaiming.
Consult a tax professional – When in doubt, get advice. An experienced tax advisor can help you navigate IRS rules and minimize audit exposure.
💡 Other Common Audit Triggers to Be Aware Of
While the home-office deduction is one major one, here are additional deductions and situations that commonly lead to audits:
Large charitable contributions relative to income.
Unusually high business expenses or mixing personal & business costs.
Multiple years with business losses. If a business consistently loses money, the IRS may question whether it’s really a business or a hobby.
✍️ Final Thoughts from Freedom Tax & Business Services
The home-office deduction can offer real tax benefits—but along with those benefits come responsibilities. To reduce your audit risk:
Always follow IRS rules for home use, exclusivity, and documentation.
Be thoughtful about how large your deductions are in proportion to your income.
Keep excellent records throughout the year so you’re ready if the IRS asks.
If you want help evaluating whether you qualify, or want someone to review your deductions to minimize IRS audit risk, we’re here for you. Freedom Tax & Business Services can ensure your return is both optimized and safe.