A lot of naïvety in this post. Expense tracking sucks, but there are IRS regulations that both employees (contractors included) and businesses must follow.
You have quite a bit of latitude in how high ceremony your expense tracking needs to be, though. "CC hotel / travel expenses to our standard address, put everything on the company card" is likely adequate, as long as there's a contemporaneous record of business travel. Many places keep that as a formal log book, but since the IRS is pretty much ambivalent about the exact form of your records as long as they capture the important stuff, a Google Calendar entry with "Bob speaking at $FOO_CONF in Boston 3/14" probably suffices. In the event of an audit, you'll be asked to provide supporting documentation (again, wide latitude) of a small sampling of those expenses, because they have no more desire to read five thousand pages of records than you do to write them. If you're unable to provide those records, but don't strike the examiner as actively malicious, they'll say "Alright, there's two ways I can do this. My book says we think you have about $X of legit deductions for this category, which is $Y less than you're claiming. Pay $Y plus our below market interest rate for making an honest mistake. Otherwise, you and I get to do things line by line, and I'm going to suddenly get very picky. Which would you prefer?"
There's also a certain element of "In the vanishingly unlikely event the IRS audited us, disallowed every expense our employees charged in the year, and then charged taxes on those plus the standard penalty interest, that wouldn't cost us enough for us to even notice it."
Spoken like someone who hasn't undergone an IRS audit.
While I agree with David for the most part, his cavalier attitude of "Well, if we get audited it will be cheaper than the cost of tracking shit" is naive. Once he goes through an IRS audit, where they turn everything upside down and consume hundreds and hundreds of hours of time then he might change his attitude of the cost of an IRS audit. They are not nearly as cheap or insignificant as he makes it out to be.
Huh? It's not the lack of paperwork that gets you audited. Your tax returns probably aren't itemized on a customer-by-customer, trip-by-trip basis.
If you get audited, you're in for tens of hours of annoying drama no matter what (in reality, it's your accountant that's going to do all the work).
If you're writing this on the assumption that a small business might handle an audit (or really even simple tax returns) on a DIY basis, get that thought out of your head now. You need an accountant at almost the moment you start seeing revenue in your business.
That depends, my aunt was audited and ended-up with close to a million dollar refund. Here attitude had long been, paying a little extra in taxes is worth not keeping track of every expense. When your actually making real money tracking every lunch has a minimal ROI.
PS: She did still took many large deductions and had reasonable records, she just played it safe when submitting her taxes.
All expenses are indeed tracked by virtue of using a credit card. Electronic receipts are forwarded to a shared email address. For everything else, we're willing to run the risk of an audit that might argue over the purpose of a lunch to save our employees the hassle of expense reporting.
http://www.irs.gov/taxtopics/tc511.html