In general, these red-flag deductions require that "adequate records" be kept, which includes two components: a daybook, ledger, trip sheet or journal in which each expense is noted "at or near the time" it was incurred, and corroborating receipts for all lodging and items costing more than $75. Your daybook may be tallied on a weekly basis and still fall within what the IRS considers timely.

According to IRS Section 274, your business log or daybook entry for a claimed expenditure must include the following:

Claimed expenditure requirements

• For T&E: date, time, place, amount and business purpose of the expenditure. In the case of business entertainment, you also need to note your business relationship to those who accompanied you. • For business gifts: date, time, amount, description, business purpose and your business relationship to the recipient of the gift. • Listed property: date, time, amount and business purpose of the purchase.

Documentary substantiation for these expenses (receipts, statements, etc.) are considered adequate if they contain the date, place, amount and character of the expenditure.

"When you get into travel and entertainment expense especially, those are the ones that tend to be most abused," according to Robert Adams, a California CPA and former IRS agent. "Generally speaking, if there is abuse in the T&E account, and there frequently is, the auditors will be extremely strict in the documentary requirements. They won't let them off the hook."

Some leeway allowed
Although it can seem so at times, the IRS and the tax courts are not without a heart.

For instance, if you lose your tax records through circumstances beyond your control (flood, fire, earthquake or other natural disaster), the tax court will accept a reasonable reconstruction of your expenditures. That said, it will still be up to you to not only reconstruct your records with exact (not approximate) amounts, but also prove that the loss was beyond your control and that adequate records actually existed in the first place.

Adams says the degree to which sloppy record keeping could cost you in an audit will likely depend on the luck of the draw.

"The younger agents have zero discretion," he says. "If I'm representing a client, what I hate to see is an auditor who only has a year or two with the service. He's going to go by the book; he has no discretion and his supervisor is going to gun him if he does something wrong."

Christensen notes however that good record keeping generally pays for itself in the end.

"The other side of this is, if you neglect keeping records, there are probably deductions that you're entitled to that no one is even considering having you take because you don't have any records," she says. "A lot of time, people could get more deductions on their return if they have records to go along with it."

Jay MacDonald is a contributing editor based in Austin, Texas.