LifeinAsia - 8:33 pm on Dec 10, 2012 (gmt 0)
the only response I would have given the OP is: "Talk to an Accountant, and Review your local Tax regulations".
To prove the claim the OP has to show expenses "Domain Receipt, Hosting Receipts, Internet Receipts, etc" and expenses are easy to prove.
Actually, to prove the claim, the OP would have to demonstrate intent to run a viable business and not just a hobby. There are a number of ways one could try to do this (e.g., having a written business plan showing a reasonable attempt to make a profit, incorporating, showing a profit in future years). In the end, it comes down to being able to convince the particular auditor, and some are more difficult to convince than others. Simply showing receipts will not always prove that you have a viable business instead of a hobby.
FYI: I've been audited about certain expense, sent the proof "receipt and reasoning", and the deduction were found valid! All of this was handled through mail with the US IRS.
This happens all the time. But there are many different types of audits. In your case, the auditor was only interested in the validity of those particular expenses. I was involved in one audit where the auditor was only about the flow of money in and out of a foreign bank account- no interest whatsoever about U.S. expenses.
If you want to be paranoid, you can, but if you want to follow the law, get in contact with an accountant.
Being paranoid and following the law are not necessarily exclusive. :)
FYI- before returning to the IT world, I was an Enrolled Agent and spent a number of years preparing tax returns. My comments come from my experience working with other tax preparers, attending numerous conferences, and studying the U.S. Tax Code. Some preparers may be willing to take more risks and push the limit. Others are more conservative.
That said, general tax advice is for reference only. ALWAYS discuss your particular situation with a professional who knows your local regulations (and preferably, has at least a basic understanding of your particular industry).