A failed mileage log, characterized by an incomplete or inaccurate record, can have serious repercussions, resulting in the negation of mileage deductions. The information below was provided to us from Bradford Tax Institute.
Keep a mileage log.
The Fraud Case
In Flake, the IRS asserted income tax deficiencies of $16,240 and $58,094 and Section 6663 fraud penalties of $12,180 and $43,571.
In this case, the court had to decide
This tax case began when an IRS revenue officer audited the Flakes’ tax returns, requested certain documentation, and met with Jim and Martha at their residence every two weeks until the examination ended about a year later.
During the audit examination, Jim and Martha provided odometer readings, credit card statements, fuel receipts, appointment book notes, and invoices as well as reconstructed calendars based on these documents. They asserted that these records met the strict substantiation requirements of Section 274(d) for vehicle deductions and that, accordingly, they were entitled to their full vehicle deductions.
Before Section 274(d), you could estimate your business mileage and the IRS and the courts could accept your estimates.
Section 274(d) did away with estimates of business mileage. Today, you need to substantiate the amount of your mileage, your time, and the purpose of each use. The courts may not estimate your vehicle deductions
Jim and Martha got zero help for their vehicle deductions in court because
In summary, the court stated that
Jim and Martha accumulated in a fireproof box a cash reserve of at least $177,000 during the 20 years before the audit. They likely triggered the audit when they took that $177,000 from their fireproof box and deposited it in the bank.
Key point. Tax law and the Bank Secrecy Act require information reporting of most cash deposits and cash payments in excess of $10,000.
In court the IRS asserted that Jim and Martha had to have fraudulently underreported their taxable income in order to have accumulated $177,000 in cash reserves. The court disagreed and found that Jim and Martha accumulated this cash because they were frugal.
The court also noted that in spite of the IRS’s biweekly audit visits with Jim and Martha at their home for almost a year, the IRS failed to present clear and convincing evidence of fraud. Accordingly, the court did not assess the fraud penalty.
But the Flakes were not so lucky on the accuracy penalty. The court ruled that Jim and Martha were liable for the 20 percent accuracy penalty because they had failed to know the law and to keep accurate records of, among other things, their vehicle deductions.
You want to follow the five steps above so that you don’t have to do as Jim and Martha did—visit with an IRS agent every two weeks for almost a year and then have to go to court hoping to overcome the IRS assertions so that at least some of your deductions survive.
July 27, 2023 | DWHuff Consulting
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