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THE ULTIMATE MISTAKE TAXPAYERS MAKE DURING IRS AUDITS

9/25/2020

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What is the ultimate sin in an IRS audit?
 
Suppose you just received that lovely 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?
 
Think of the record people most hate keeping. That’s the one we are talking about. You have probably guessed what that record might be. You might even know because you had a recent audit and didn't have this record..... think about it!
​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.
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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:
 
  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.
 
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. We have seen dozens and dozens of IRS audits end favorably and quickly upon presentation of a good mileage log.
 
On the other hand, a bad mileage log can turn your IRS examiner into an 800-pound gorilla.
 
Think of it this way: your mileage log gives you the choice to get in and out of the IRS audit quickly and with your wallet or to spend time with an 800-pound gorilla.
 
We are happy to help you create a mileage log. If you would like our help, please contact us.
 

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    Important Disclosures


    Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.

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    To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
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    These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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    Author

    Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion.  Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.

    Keana founded this website and decided and created this blog page to offer a space for those seeking knowledge to understand, however not to be confused with advice or planning strategies.

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