What is the unpardonable sin in an IRS audit?

Suppose you just received a letter from the IRS telling you that you are the subject of an IRS audit. (I can hear you shaking in your boots).

What one record receives special attention? Can create a nightmare for you, if its not correct? Makes the IRS suspect that you are the keeper of lousy records.

Think of the record you most hate keeping. That’s the one we are talking about. Mileage! Did you guess it right?

Red-Flag Record for the IRS Examiner

Once your audit begins, the examiner likes to see this record. If the record is missing or lacking, the IRS examiner will likely assume that your other records probably are lacking, too.

The IRS notes that a taxpayer’s failure to keep a mileage log indicates that the activity is not being conducted in a businesslike manner. That’s a big uh-oh for you!

Do as the Tax Form Says

As a one-owner or husband-and-wife-owned business, regardless of whether it’s a corporation, a partnership, or a proprietorship, you file a tax form that asks you for the following information about your vehicles:

Do you have evidence to support the business/investment use claimed? (If “yes,” is the evidence written?)
- Total business/investment miles on each vehicle.
- Commuting miles
- Personal use miles

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:

Send copies of repair receipts, inspection slips, and other records showing total mileage for the year.
Send copies of logbooks and other records to support the business mileage claimed.
Provide a copy of your appointment book or calendar of business activities for the year.
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.
To establish your basis in the vehicle, including the trade-in of another vehicle, send a copy of the bill of sale or other verification.

This is 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
A business purpose that ties in with your appointment book or other calendar of business activities.

Takeaways

If you want to avoid big trouble during an IRS audit, keep a good mileage log. This takes just minutes a day.

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.

For more information, this article and many more to help your business grow are on our website cdprofessionalservices.com