There is what is called the “unpardonable sin” in an IRS audit. As self employed or business owner when you received a letter from the IRS telling you that you are the subject of an IRS audit, there is one record that receives special attention. This record can create a nightmare for you. This record makes the IRS suspect that you are the keeper of lousy records. Unfortunately, many taxpayers neglect to keep it.

This record is the mileage log on your vehicle or vehicles.

Once your audit examination begins, the examiner would like to see this record. If the record is missing or lacking, the IRS examiner knows that your other records probably are lacking, too. 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.

You must do as the tax form says. As one-owner or husband and wife owned business, regardless of whether it is a corporation, a partnership, or a sole proprietorship, you file a tax form that asks you for the following information about your vehicle or 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.

The mileage log is the record of proof that you need to use for your answers to the tax form questions.

Internal Revenue Code section 162 allows a taxpayer to deduct all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. As stated by the courts in INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934), a taxpayer must prove his entitlement to any deductions claimed. 

Under the Cohan rule, a Court may estimate the amount of an expense if the taxpayer is able to demonstrate that he has paid or incurred a deductible expense but cannot substantiate the precise amount, so long as he produces credible evidence that gives a basis for the Court to do so. However, section 274 of the code imposes strict substantiation requirements that supersedes the Cohan rule for certain expenses, including those for travel.

“For expenses, such as an automobile used for business purposes, a taxpayer must substantiate by adequate records or by sufficient evidence corroborating the taxpayer’s own statement: (1) the amount of the expense, (2) mileage for each business use of the vehicle as well as the total mileage for all purposes during the taxable period, (3) the time and place of the travel or use, and (4) the business purpose of the expense”.

The Tax Court, in Johnson v. Commissioner (T.C. Memo. 2020-79), affirmed IRS disallowance of expenses deduction for business trip because the taxpayer did not maintain sufficient record to establish the purpose of the trip. The taxpayer presented as primary evidence in support of his claim for travel-related and car and truck expense deductions a Microsoft Outlook calendar that reflects his travel during the tax periods at issue, in addition to his testimony. The purpose of the visit is not described. The court concluded that without that information, it cannot determine which of petitioner’s trips was for a business purpose as required under the code section 162. 

Johnson v. Commissioner (T.C. Memo. 2020-79)
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992)
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934)
Cohan v. Commissioner , 39 F.2d 540, 543-544 (2d Cir. 1930)
Vanicek v. Commissioner , 85 T.C. 731, 742-743 (1985)
Sanford v. Commissioner , 50 T.C. 823, 827-828 (1968) 
IRC sections 162, 274
Treas. Regs. sec. 1.274-5T(a)

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