Suppose you just received a letter from the IRS telling you that you are the subject of an IRS audit. What one record receives special attention? What one record can create a nightmare for you? What one record makes the IRS suspect that you are the keeper of lousy records?
Under the Tax Cuts and Jobs Act (TCJA), the mileage deduction for employees is no longer available. Sole proprietors, filing on Schedule C, and other business entities are still eligible for a business deduction for the use of their automobile.
Red-Flag Record for the IRS Examiner
Once your audit examination begins, the examiner likes to see this record. If the record is missing or lacking, the IRS examiner knows that your other records probably are lacking, too. This record—the one you probably hate keeping—is the mileage log on your vehicle or vehicles.
The IRS notes that a taxpayer’s failure to keep a mileage log on vehicles indicates that the activity under examination is not being conducted in a businesslike manner.
Do as the Tax Form Says
As a one-owner or husband-and-wife-owned business, regardless of whether it is a corporation, a partnership, or a proprietorship, you file a tax form that asks you for the following information about your vehicles:
1. Do you have evidence to support the business/investment use claimed? (If “yes,” is the evidence written?)
2. List your total business/investment miles on each vehicle.
3. List your total commuting miles on each vehicle.
4. List your total personal miles on each vehicle.
IRS Form 4562 has columns for answers to the above questions for up to six vehicles used by either a sole proprietor or an owner of more than 5 percent of a corporation, a partnership, or another entity. The mileage log is the record of proof that you need to use for your answers to the tax form questions.
Do What the Audit Would Require
Above, we said to do as the IRS form says. For additional clarification, it is good to know what information the IRS, in a correspondence audit, requires you to provide related to that tax form:
1. Send copies of repair receipts, inspection slips, and other records showing total mileage for the year.
2. Send copies of logbooks and other records to support the business mileage claimed.
3. Provide a copy of your appointment book or calendar of business activities for the year.
4. If you are claiming actual expenses, provide copies of paid bills, invoices, and canceled checks for automobile expenses. These would include gas, oil, tires, repairs, insurance, interest, tags, taxes, parking fees, and tolls.
5. Send a copy of the bill of sale or other verification to establish your basis in the vehicle, including the trade-in of another vehicle.
Note that the IRS is looking for
· a match of the repair bill odometer reading with the mileage in your logbook;
· a match of the inspection slip odometer reading with the mileage in your logbook;
· the mileage between repair stops, to see whether that ties in with your claimed mileage; and
· a business purpose that ties in with your appointment book or other calendar of business activities.
If you want to avoid big trouble during an IRS audit, keep a good mileage log. This includes not only the beginning and ending mileage, but who you went to see and the purpose of the trip.
The mileage log is often one of the first records that an IRS examiner will look at. A good mileage log shows that you know the rules and you respect them. Many IRS audits end favorably and quickly upon presentation of a good mileage log.