How to Avoid IRS Audit Triggers as a Locum Tenens Physician

Common IRS Audit Triggers for Locum Physicians

The IRS uses a variety of markers to flag tax returns. Locum tenens physicians, who often work across multiple contracts and states, frequently fit the profile for further review. These are the most common IRS audit triggers:

Unreported or Inconsistent Income

When you work across multiple states or contracts, it’s critical to report all your income. Some states have reciprocity agreements, which means you only need to fill out one form. However, if the states you worked in don’t have such an agreement, you will have to complete both:

• A resident tax return in your home state
• A non-resident return in each state where you worked

Missing a state return or misreporting income across jurisdictions can easily trigger a federal and state tax audit.

Aggressive Deductions

As a 1099 contractor, you can deduct a wide range of business expenses, provided they are “ordinary and necessary” within the context of your business and activities, and above all, well-documented. to avoid IRS audit triggers, be especially cautious with:

• Business and travel meals consumed as part of your daily schedule, even during working hours, are not “ordinary and necessary.” However, there are specific guidelines related to business and travel meals.
• Very high deductions relative to your income
• Claims of 100% business use for personal items like electronics or vehicles
• Home office deductions without a clearly defined workspace
• 100% auto deduction and aggressive car mileage are commonly questioned

The IRS expects a logical, well-supported rationale for all deductions.

Mixing Personal and Business Expenses

Blurring the lines between personal and professional spending can trigger scrutiny.  Comingling of funds can even lead to the denial of all your business deductions. If you purchase a laptop or vehicle for work, only the portion used for business is deductible. For example, if you use your cell phone plan 70% for work and 30% for personal use, you can only deduct 70% of its cost. 

Maintain separate accounts or credit cards for business-related expenses to keep things clean.

Incorrect Filings

Depending on the type of entity you have decided on, you are required to file the correct tax returns. For example:

• Sole proprietor – Schedule C
• Partnership – Form 1065
• S-corporation – Form 1120s
• C-corporation – Form 1120

Not knowing which forms you are required to file or incorrectly filing the forms with missing information commonly leads to IRS and state questions.

What to Do if You Receive an IRS Audit Letter

No one likes receiving mail from the IRS, but if you do, stay calm and act quickly. Here’s what to do if you receive an IRS audit letter:

1. Open and Read the Letter

Most IRS audit letters typically begin by requesting additional information or clarification.  Most often, these letters have deadlines. Unless you open the letter and read through the request, you cannot address the questions and/or meet the deadline. The majority of the time, once you address the IRS questions, send in the additional documents, or fill in the missing information, the IRS tends to go away. On the other hand, not responding or missing the deadline almost always results in more stringent IRS actions. 

2. Identify the Type of Notice

Not all IRS audit letters indicate a full audit. Understanding the type of notice helps you respond appropriately: 

• Automated Adjustment: The IRS made a correction. If you agree, no action is needed.
• Correspondence Audit: The IRS requests documentation by mail to verify reported details. 
• Office or Field Audit: A more detailed, in-person review (rare for 1099 physicians).

Each notice includes a response deadline. Don’t miss it. Delays can escalate penalties. 

3. Organize Relevant Documentation

There are a few common documents the IRS typically requests during an audit, including:

• Receipts and invoices
• Bank statements
• Prior tax returns
• Employment contracts
• Canceled checks
• Loan agreements
• Travel records
• Medical-related records

Depending on the claim, you may need to provide some or all of these documents. For example, if the IRS is verifying your income as a 1099 contractor, they may request bank statements or prior tax returns to confirm the accuracy of your reported income. Finally, keep in mind these documents won’t stand on their own; the IRS takes context into account.

A common misconception is that the IRS simply needs bank or credit card statements. While these documents are credible proof of payment, they provide no clarification as to what was purchased, who you met with, or what the context of the expense was. 

Matching receipts, emails, or any additional contextual documents tends to resolve the matter, once again assuming the expenses are “ordinary, necessary, and reasonable” within the context of your profession.

4. Decide Whether to Hire a CPA

You may be able to handle a basic audit independently. But when the stakes are high or the details are complex, professional support makes a difference.

• Consider self-representation if you agree with the IRS findings and have all supporting documents ready.
• Hire a CPA if you need help disputing IRS claims, navigating multi-state taxes, or preparing documentation.

Consider working with a CPA who specializes in helping locum tenens physicians navigate audits, resolve discrepancies, and minimize penalties.

Proactive Steps to Stay Audit-Ready

While you can’t eliminate the risk of an IRS audit, you can reduce it and be better prepared if one happens.

Here are a few proactive steps:

• Track income and expenses monthly. Don’t wait until tax season.
• Use separate accounts for business and personal use.
• Keep documentation for at least 7 years, especially for large deductions.
• Review state tax laws before accepting contracts from out-of-state entities.
• Run your IRS tax records and transcripts to review who and what has been reported under your SSN.

Stay Compliant and Avoid Unnecessary Penalties

Working across state lines is a lucrative strategy for locum tenens physicians, but only as long as you stay tax compliant. While you hopefully won’t have to deal with an IRS tax audit anytime soon, it pays to be prepared. 

At The Doctor’s CPA, we help locum tenens physicians manage multi-state tax compliance, optimize deductions, and respond to IRS inquiries with confidence. Whether you’re facing an audit or just want to ensure you’re on solid financial ground, we’re here to help.

Let’s build a plan that works as hard as you do. Schedule a consultation today to get started.