Every tax season, millions of Americans legally claim deductions to reduce their tax bill. However, what many taxpayers don’t realize is that some perfectly legal deductions consistently receive closer IRS scrutiny than others.
This does not mean these deductions are forbidden or risky by default. It simply means they are more frequently misused, overstated, or improperly documented, prompting the IRS to take a second look.
Understanding which deductions attract attention—and how to properly defend them—can significantly reduce audit stress and processing delays. Below are seven deductions the IRS watches closely, along with practical steps to protect yourself if questioned.
1. Home Office Deduction
The home office deduction remains one of the most scrutinized tax benefits, especially for self-employed individuals and gig workers.
Why It Gets Flagged
- Space must be used exclusively and regularly for business
- Many taxpayers incorrectly include mixed-use areas
- Overstated square footage is common
How to Defend It
- Measure the space accurately
- Keep photos of the office area
- Maintain records showing business use
- Avoid claiming shared spaces like bedrooms or kitchens
2. Charitable Contributions (Especially Cash Donations)
Charitable deductions are legitimate, but they are frequently overstated, especially cash donations.
Why It Gets Flagged
- Missing receipts or acknowledgments
- High donations relative to income
- Non-cash donations with inflated values
How to Defend It
- Keep written acknowledgments for donations over $250
- Maintain bank records for cash gifts
- Use fair market value for donated items
- Retain charity documentation for at least three years
3. Vehicle Expenses for Business Use
Claiming vehicle expenses can significantly reduce taxes—but it’s also a major audit trigger.
Why It Gets Flagged
- Personal and business use often mixed
- Mileage logs are missing or estimated
- High deductions compared to income
How to Defend It
- Keep a contemporaneous mileage log
- Record date, destination, purpose, and miles
- Choose one method (standard mileage or actual expenses) correctly
- Avoid estimates or recreated logs
4. Meals and Entertainment Deductions
Although entertainment deductions are mostly disallowed, business meal deductions are still valid—but closely watched.
Why It Gets Flagged
- Confusion between meals and entertainment
- Personal meals claimed as business expenses
- Missing business purpose documentation
How to Defend It
- Keep receipts showing date, amount, and participants
- Note the business purpose clearly
- Ensure meals qualify under IRS rules
- Separate personal meals from business claims
5. Earned Income Tax Credit (EITC)
The EITC helps millions of low- and moderate-income families, but it has one of the highest error rates, leading to mandatory IRS reviews.
Why It Gets Flagged
- Incorrect income reporting
- Errors in dependent qualifications
- Filing status mismatches
How to Defend It
- Verify child residency and relationship rules
- Keep school, medical, or childcare records
- Ensure income matches employer reports
- File accurately to avoid refund holds under the PATH Act
6. Large Schedule C Losses
Reporting consistent or unusually large business losses can raise red flags.
Why It Gets Flagged
- Hobby vs. business concerns
- Losses year after year
- Minimal income with high expenses
How to Defend It
- Maintain business plans and invoices
- Show profit motive evidence
- Keep expense receipts and contracts
- Demonstrate active participation in the business
7. Rental Property Deductions
Rental deductions are legal—but errors are common, especially with depreciation and repairs.
Why It Gets Flagged
- Personal use of rental property
- Misclassified repairs vs. improvements
- Incorrect depreciation schedules
How to Defend It
- Keep lease agreements and rental records
- Separate personal and rental expenses
- Maintain depreciation schedules
- Document repair vs. improvement distinctions
What Extra Scrutiny Actually Means
Importantly, extra scrutiny does not automatically mean an audit.
In many cases, the IRS:
- Requests documentation
- Holds refunds temporarily
- Verifies income or deductions
- Issues clarification letters
Most issues are resolved by providing proper records, not penalties.
Key Takeaway for Taxpayers
Claiming deductions is your legal right. Problems arise not from the deduction itself, but from:
- Poor documentation
- Overstatements
- Misunderstanding eligibility rules
Good records are your strongest defense.