The Home Office Deduction Audit Risk Myth

by
John Henderson, EA
Updated 
March 11, 2022
December 22, 2021
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Every year, self-employed people worry that taking a home office deduction will trigger an IRS audit. Is claiming home expenses even worth the risk?

There's no question that the home office deduction is a real, legitimate deduction — one that qualifying freelancers and business owners shouldn't ignore. At the end of the day, it can save you a lot on your home expenses: rent, utilities, repairs, property taxes, and more. 

The real question is twofold. First, why do some many people believe that taking this legitimate deduction will trigger an audit? And second, how can you avoid getting audited if you write off home expenses?

Contents

Where the home office deduction audit risk comes from

The home office deduction has been around for a long time. The IRS has allowed some form of home office deduction since 1959.

Back then, sections 262 and 263 of the tax code labeled the all expenses of maintaining a household non-deductible — unless the taxpayer “uses part of the house as his place of business”.

So why are people still scared to take this deduction? Long story short, their fear comes from changes in tax law and the IRS's normal fraud detection measures.

Tax code changes and Supreme Court decisions

Enter the Tax Reform Act of 1976. This introduced Section 280A, which allowed taxpayers to deduct expenses like utilities, home insurance, and home depreciation on a prorated basis. 

Since then, we've had about one major event related to Section 280A every decade. It's either a notable change to IRS rules, or a new Supreme Court decision that impacts how it's applied.

All these shifts can be dizzying to keep track of. They're also a big part of the persistent home office deduction audit myth.

Thanks to these tax code revisions and Supreme Court cases, taxpayers who took the home office deduction in good faith sometimes ended up having to pay back the deduction amount later — all because the IRS or the legal system changed things up on them.

The IRS's fraud prevention system

There's one other contributing factor to the home office audit myth: the IRS's normal fraud prevention measures.

Naturally, the IRS is always on the lookout for red flags that can make it easier to identify tax fraud. To help it out with this, it uses a computer system known as the Discriminant Inventory Function (DIF).

This system looks at obvious anomalies in tax returns, grouped by profession. What does that mean? Essentially, the DIF compares your tax return to the ones from other taxpayers who have similar tax profiles.

Here's an example. Say the average person in your field deducts 5% of their income for business travel. If you deduct 20% of your income for travel, you might get flagged as an anomaly — which increases your risk of an audit.

What does this mean for the home office deduction in particular? It doesn't mean you should skip it entirely. You just have to make sure your deduction is reasonable and well-documented. We'll talk more about this later!

The IRS Fraud Enforcement Office

Unfortunately, a change in 2020 might keep the home office audit risk myth alive. That March, the IRS created a new Fraud Enforcement Office — a part of their Small Business / Self-Employed Division.

This office provides resources for handling fraud-related issues, both intentional and accidental. Actually, its remit includes issues across the IRS.

Still, its home in the Small Business / Self-Employed Division had freelancers and independent contractors feeling nervous. (That division currently oversees approximately 57 million tax filers, including about nine million small businesses.) 

What the Fraud Enforcement Office means for self-employed people

The Fraud Enforcement Office was designed to focus on three different kinds of tax situations:

  • ❌ Underreported tax obligations: This can mean failing to report all your income, or overstating your business expenses
  • ❌ Underpayment of tax obligations: This can mean not paying on time, or not meeting your full tax obligation
  • ❌ Failure to file tax returns: If you forgot to file, that’s obviously a red flag.

The big picture implication: As an independent contractor or small business owner, you just have to stay on top of your taxes. That means filing on time, whether you're paying annually or quarterly, and it means reporting all your 1099 income accurately, even if it's paid in cash.

Most important of all, steering clear of the Fraud Enforcement Office means making sure your business expenses are reasonable and well-documented — including any home office expenses. You won't have to keep rooms full of hoarded paper receipts, but you do have to keep up with what you're buying for work.

You can streamline that kind of expense tracking with Keeper Tax, an app that automatically scans your purchases for qualifying deductions and categorizes them for you.

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When the home office deduction could trigger an audit

As you know now, taking the home office deduction alone won't trigger an IRS audit. But depending on your tax situation, it could end up being a red flag. 

When claiming a home office is unusual for your profession

Say you're a freelance stunt driver, working on movie and film sets. If practically no other stunt drivers claim a home office, but you do, the IRS might want to take a closer look at your taxes.

Now, say you're a contract software developer claiming a home office. Lots of other developers do the same thing, so it's a lot less likely to be an issue.

When you claim too much space for your home office

Audit risk factors aren't limited to your profession. The IRS might also look at the amount of your home you claim to use for work.

If you say that 90% of your 900-square foot apartment is your dedicated workstation, for example, that will likely raise some eyebrows over at the IRS. Claiming 10%, though, is a lot more reasonable.

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How to make your home office deduction audit-proof

To minimize the risk of your home office deduction becoming a red flag, there are some questions you should ask yourself. (You can also find out if you qualify by taking our home office deduction quiz, which will tell you all the home expenses you can write off, too.)

Are you a qualifying taxpayer?

This one's easy. You count as a qualifying taxpayer for the home office deduction if you're one of the following:

  • ✅ Self-employed
  • ✅ A freelancer
  • ✅ An independent contractor
  • ✅ A gig worker
  • ✅ A small business owner

Note that employees aren’t on the list. If you only work as a W-2 employee, you can't write off a home office anymore. The Tax Cuts and Jobs Act (TCJA) suspended this deduction for employees from 2018-2025. 

Does your residence count as a "home"?

The term “home” includes several different types of structures. It covers the traditional primary residence — houses, apartments, condos, mobile homes, and even boats. It also includes freestanding structures on your property, like studios and unattached garages or barns.

For the purpose of taking a home office deduction, though, hotels, motels, inns, and other businesses don't count as "homes." That's true even if you live there. (If you rent out your home on Airbnb, though, that’s totally okay.)

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Are you using your home for business in a way that qualifies? 

As you can probably guess from our mention of studios and barns, a home office doesn’t have to be a conventional office at all. A home gym where you see personal training clients will count. So will an atelier where you upcycle clothes for your Etsy shop.

To claim your home office tax deduction, you have to be using your home for business purposes. But that can take many forms. Here are the uses recognized by the IRS:

  • 👔 As your principal place of business
  • 🤝 As a place where you regularly meet with clients, customers, or patients
  • 🛍️ As storage for your inventory or product samples
  • 🏘️ As a rental property
  • 👶 As a daycare

The IRS requires "exclusive use" of your home office for business. That doesn't mean you need an entirely separate room. But you do need a dedicated workstation that you don't also use for "play."

A clearly separated area within a room — like a desk in your bedroom — will count. Your workstation just can't be a shared space, like your kitchen table or living room couch.

Bottom line: Don't let unfounded fear of audits stop you from saving on your taxes. If you regularly work from home, this is a write-off that you shouldn't miss. And as long as you're being reasonable and keeping track of your home expenses, there's no reason to skip it.

If you do qualify for this deduction, there are two ways to take it. To find out more, check out our post on the simplified home office method versus the regular method.

John Henderson, EA

John Henderson, EA

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John Henderson is the founder and sole proprietor of Barn Cat Consulting, LLC – a Hoisington, KS based business specializing in tax accountancy, tax preparation and IRS representation while also providing payroll and HR solutions. As an Enrolled Agent and QuickBooks ProAdvisor, John has helped individuals, families, businesses, and non profit organizations navigate the complex US Tax Code

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