Be Ready for an IRS Audit of Your Automobile Expenses

Nobody wants to keep a mileage log but everyone wants to deduct the cost of their vehicle on their taxes. This creates a problem. A problem that could cost you big money.

Without a mileage log you could lose your entire deduction related to automobile expenses and pay a 20% negligence fee on the difference. Let’s say you had $10,000 of auto expenses that you deducted. You know that hardly anyone keeps a mileage log so you didn’t bother. 

But, the IRS came calling and the first thing they asked to see was your mileage log. Why? The IRS knows this is an easy hit. They also know that if you don’t keep a mileage log it is likely there are other things on your tax return missing backup. If they get you for not having a mileage log, why not look a little deeper?

No mileage log costs you the $10,000 deduction times your tax rate (don’t forget the pain of the audit and the cost of CPAs and attorneys to help you through the process). You’ll also owe interest to the IRS from the time the taxes would have been due. Then, you could have the privilege of paying a 20% negligence penalty on the taxes you hadn’t paid. Sound like fun?

If you claim automobile expenses on your return you must back it up with an adequate mileage log for when you get audited. 

Let’s look at the case of Alvaro Velez. Mr. Velez was an Ohio based attorney with five offices across the state. You can read the Tax Court Memo here. Velez claimed an $18,946 mileage deduction for travel but did not maintain a formal mileage log. 

After an audit by the IRS, the agency rejected Velez’s entire mileage deduction. Velez appealed, but did not prevail. Velez recreated a mileage log based on his calendar and expense receipts. The Tax Court found this log failed to satisfy the substantiation requirements because it was created years after the expenses actually took place.  

Velez not only went through the expense and pain of an audit and subsequent court appearance, he lost the $18,946 deduction and had to pay a 20% or $3,948 negligence penalty. 

Does that story making keeping a mileage log sound more palatable? 

You may have heard that the Tax Court can estimate the amount of the allowable expenses if the taxpayer does not have records. That is something referred to as the Cohan rule and it does not apply to expenses listed under code section 274(d). You probably guessed that automobile expenses are one of those listed expenses that requires substantiation. Unfortunately, there is no easy way out. If you get audited, you will need a mileage log or you will lose your automobile deduction and face interest and penalties. 

For another example (if you’re into this type of reading), check out the case of George Gist. He lost a $53,625 deduction for not having a mileage log. 

What are you to do? Keep a mileage log or risk losing your deduction, plus penalties and interest. 

But a mileage log is too big of a pain! I know. Technology is coming to your rescue. Our phones can track every move we make and, in this case, they might keep you out of trouble with the IRS. 

Check out this review of mileage tracker apps. Find one you like and start using it! If you’d like to stick with the old pen and paper method, ask your tax advisor for a paper version. 

Disclaimer – Talk to your qualified tax advisor about this or any other tax issues you have. Taxes are complicated and you need a pro to help you make the right moves so you can get back to business. This blog is for informational purposes only and not intended as tax advice!

Filed Under:

Comments are closed here.