During the process of providing tax preparation and tax planning services to our clients, we are constantly reminding them that the IRS requires that a contemporaneous mileage log book be maintained by them showing the odometer reading as of January 1 and December 31, and for each business trip, the date, mileage driven, and business purpose of the trip.
Lacking this documentation, the taxpayer is not entitled to a vehicle tax deduction. Tax deductions cannot be claimed by a taxpayer who simply says “I drove my car about 25,000 miles for business.” Although we have previously posted about this strict IRS substantiation requirement, we see each year that taxpayers often lose a valuable tax deduction simply because of their refusal to document the business use of their vehicle.
The U.S. Tax Court recently decided a case in favor of the IRS (T.C. Summary Opinion 2014-44 concerning Jason Daniel Abelitis and Jaime Ann Abelitis, taxpayers). This case is about taxpayers who claimed various tax deductions without ample support and documentation. During a six-year period, Jason Abelitis reported substantial business losses with respect to his mobile advertising business. The losses were primarily a result of car and truck expenses claimed by the taxpayer using the standard mileage rate. The Court agreed with the IRS that its determinations in a notice of deficiency are presumed correct, and the taxpayer has the burden of proving that those determinations are erroneous.
What we found particularly interesting about this case is the taxpayer’s apparent disregard for IRS rules and the belief that if examined by the IRS, the taxpayer could provide support and logical arguments to justify its tax deductions. How many taxpayers think this way? The key word here is “support”. If what the taxpayer considers support does not meet the IRS’s requirements, the taxpayer loses. Logical arguments also fall on deaf ears when dealing with the IRS if its substantiation requirements are not met. Another key component of claiming a vehicle tax deduction is that the taxpayer must maintain s contemporaneous log book. When a taxpayer is examined by the IRS and attempts to reconstruct its mileage log book, the taxpayer has not maintained a contemporaneous log book and will lose the tax deduction.
Code Section 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Deductions are strictly a matter of legislative grace, and a taxpayer must meet the specific statutory requirements for any deduction claimed. Certain business deductions described in section 274, however, are subject to strict substantiation. The deduction of auto expenses falls within section 274. The Court found that Abelitis did not maintain contemporaneous mileage logs or odometer readings for his vehicle, but used a monthly schedule of locations driven and the total miles driven as the basis of his deduction. The Court also found for the IRS that Abelitis’ extensive driving did not appear to be ordinary and necessary to his mobile advertising business. The Court noted that notwithstanding whether taxpayer’s excessive driving was ordinary and necessary for his mobile advertising business, he simply did not satisfy the strict substantiation requirements of sec. 274(d) for claiming car and truck expenses.
When the IRS assessed the taxpayers their tax deficiency when the auto deduction was disallowed, the IRS also imposed an accuracy-related penalty. This penalty is imposed with respect to any portion of an underpayment if a taxpayer cannot demonstrate that there was reasonable cause for that portion of the underpayment and that they acted in good faith with respect to that portion. On the basis of the taxpayer’s failure to keep adequate books and records or to substantiate items properly, the Court concluded that the IRS had produced sufficient evidence to show that the imposition of the 20% accuracy-related penalty under Code Sec. 6662(a) was appropriate.
With respect to other arguments presented by the taxpayer, the Court stated that it had considered all of the arguments, and, to the extent not addressed in its written decision, the Court concluded that they were moot, irrelevant, or without merit.
Accordingly, if you want to learn more about ways to substantially document your tax deductions to withstand IRS scrutiney, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA officeto discuss your situation.
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