Audit Preparation Guide
How to Prepare for an IRS Audit
Real estate agents face elevated audit risk. Here's what factors increase audit likelihood, how to prepare, and what to do if you receive that letter.
SnapExpenses is an IRS Schedule C–aligned expense tracking app built specifically for independent real estate agents.
~1%
of returns audited annually
3-6 yrs
IRS can go back to audit
75%
of audits are by mail
Why Real Estate Agents Face Higher Audit Risk
Self-employed individuals filing Schedule C are audited at higher rates than W-2 employees. Real estate agents have additional risk factors:
- High deductions relative to income (staging, marketing, vehicle)
- Variable income that can fluctuate dramatically year to year
- Cash-adjacent business with potential for unreported income
- Common use of home office and vehicle deductions (frequently abused)
- Meal and entertainment expenses that require strict documentation
Common Audit Factors
The IRS uses algorithms to flag returns that deviate from norms. These factors do not guarantee an audit, but are commonly cited in IRS guidance and audit outcomes.
Here are the most common factors for real estate agents:
High Deductions vs. Income
high riskClaiming deductions that are unusually high compared to your gross income may increase audit likelihood. The IRS compares your return to industry averages.
Schedule C Losses
high riskReporting losses year after year, especially while maintaining a lifestyle inconsistent with those losses, may result in IRS correspondence.
Round Numbers
medium riskClaiming exactly $5,000 for advertising or $10,000 for supplies suggests estimation rather than actual tracking.
Home Office Deduction
medium riskThis deduction receives close IRS attention. You must use the space exclusively and regularly for business.
Vehicle Expenses
high riskClaiming 100% business use of a vehicle may increase audit likelihood. Most agents have some personal use. Lack of a mileage log is common.
Meal & Entertainment
medium riskHigh meal deductions without proper documentation (who attended, business purpose) are frequently disallowed in audits.
Cash Transactions
medium riskReal estate involves large cash flows. Inconsistencies between reported income and lifestyle may increase audit likelihood.
Missing 1099s
high riskIf your reported income doesn't match 1099s received by the IRS from brokerages, this may result in IRS correspondence.
Documentation Requirements
The IRS requires contemporaneous records to substantiate business deductions.
Without adequate documentation, deductions will be disallowed. Here's what you need:
Every Expense
- Receipt or invoice (vendor, date, amount)
- Proof of payment (bank/credit card statement)
- Business purpose notation
- Category/Schedule C line assignment
Vehicle/Mileage
- Contemporaneous mileage log
- Date of each trip
- Starting and ending location
- Business purpose of trip
- Miles driven
- Total annual miles (business + personal)
Meals
- Receipt showing vendor, date, amount
- Names of all attendees
- Business relationship of each attendee
- Business purpose/topics discussed
Home Office
- Square footage of office space
- Total square footage of home
- Photos of dedicated workspace
- Utility bills, mortgage/rent statements
How Long to Keep Records
| Record Type | Keep For |
|---|---|
| Tax returns and supporting documents | 7 years |
| Receipts and expense records | 7 years |
| Bank and credit card statements | 7 years |
| Mileage logs | 7 years |
| Property/asset records (depreciation) | Life of asset + 7 years |
| 1099s received | 7 years |
Why 7 years? The standard audit window is 3 years, but extends to 6 years if you underreported income by 25% or more. Retaining records for seven years aligns with conservative recordkeeping practices recommended by tax professionals.
What To Do If You're Audited
Most real estate agent audits are correspondence audits focused on specific Schedule C line items.
Don't Panic
Most audits are correspondence audits handled entirely by mail. Only about 1% of returns are audited, and most result in minor adjustments.
Read Carefully
Understand exactly what the IRS is questioning. They usually target specific line items, not your entire return. Note all deadlines.
Gather Documentation
Pull together all records for the items in question. If you don't have receipts, gather bank statements, credit card records, and vendor records.
Consider Professional Help
For complex audits or large amounts, hire a CPA or tax attorney. They can represent you and often achieve better outcomes.
Respond On Time
Never ignore an audit notice. If you need more time, request an extension before the deadline. Ignoring it only makes things worse.
Keep Copies
Send copies of documents, never originals. Keep records of everything you send and all correspondence with the IRS.
Consequences of Poor Documentation
If deductions cannot be substantiated during an audit, the IRS may apply the following outcomes:
Deductions Disallowed
You'll owe additional tax on the disallowed amount
Interest Charges
Interest accrues from the original due date of the return
Accuracy Penalties
20% penalty may apply for negligence or substantial understatement
Future Audit Risk
Audit findings can increase scrutiny of future returns
Best Practices for Audit Readiness
Capture receipts immediately
Don't wait until year-end. Capture receipts when you get them.
Document business purpose
Note why each expense was necessary for your business.
Keep a mileage log
Track every business trip with date, destination, purpose, and miles for the applicable tax year.
Separate business and personal
Use dedicated business accounts and credit cards.
Claim what you're entitled to
Claim what you are entitled to, supported by accurate and complete documentation.
Work with a CPA
Professional preparation reduces errors and provides guidance.
Maintain Audit-Ready Schedule C Records
SnapExpenses captures receipts the way the IRS expects—with receipt images, business purpose, and Schedule C categorization. Export audit-ready documentation for your CPA anytime.
This guide is maintained by SnapExpenses, an expense tracking tool built for real estate agents filing IRS Schedule C.
This guide is for informational purposes only and does not constitute tax or legal advice. If you receive an audit notice, consult a qualified CPA or tax attorney. Tax laws and procedures change frequently.