The IRS Vehicle Expense Audit is for real!
A friend of mine drives for Uber and Lyft. He was recently selected for a 2017 IRS vehicle expense audit. Listen closely to his tale of woe and take heed oh lazy business owners!
He was being audited because he claimed 100% business use of his vehicle using the actual expense method. He tried saving a buck by preparing his own business tax return with Turbo Tax. Using Turbo Tax to prepare your own business tax return almost never ends well. An Enrolled Agent would never allow such tax madness. Turbo Tax does.
He called me for advice. Below is the information the IRS was requesting, followed by a description of what he could have done to defend himself in the event of an IRS vehicle expense audit.
His mileage log was at the top of the list.
He had no mileage log. He could have used one of the free or low cost mileage tracking apps that would have easily satisfied this request. I personally use Sheets in Google Docs which works great. I recommend using Quickbooks Self-employed to my small business clients which includes a great mileage app.
Receipts for all of the gas, repairs and maintenance expenses he deducted.
He was missing some of those as well. Again I would recommend using Quickbooks Self Employed. It has a feature that allows you to take a picture of your receipts and upload them into your Quickbooks app thus ensuring that you never lose them.
Receipts with odometer readings close to the beginning and end of the year.
Yep. You guessed it. He did not have these either. The IRS wants to see these in order to verify that you actually put the total miles on your vehicle that you are claiming. There are two audit proof ways to do this. Every December 31st, take a picture of your odometer. This puts a date/time stamp on the picture and supports your mileage deduction. The other thing to do is get an oil change as close to December 31st as possible and save the invoice. The invoice will have your odometer reading on it. Doing these two simple tasks will more than satisfy the IRS.
The Probable Outcome
The probable outcome of my friend’s audit is going to be a disallowance of more than half of his business miles. He will still be able to deduct the miles from his Uber/Lyft statements which are less than half of his actual deductible business miles. This will equate to thousands of dollars in additional income tax due.
There will be interest on the thousands of dollars in additional tax that he will owe with possible accuracy related penalties as well.
There will also be the added expense of the lawyer his understandably stressed out wife hired to deal with the audit. Several thousand dollars more I am sure.
There is also a very high probability that the IRS is going to audit his 2016 and 2018 tax returns as well.
This could have all been avoided had he took the time to keep a real mileage log and use an inexpensive bookkeeping system. Quickbooks Self-Employed would have cost him $180 or less for the year.
As far as competent tax preparation goes, I would have charged him around $350 for his business and personal tax return, and I am sure he would not have been audited in the first place.
Trying to save a buck on bookkeeping and competent business tax preparation is a recipe for financial disaster.
Lessons Learned From an IRS Vehicle Expense Audit
Keep a mileage log. It is so easy. It is one of the biggest mistakes small business owners make.
Save your vehicle gas, maintenance and repair receipts. Get QuickBooks Self Employed and start acting like a real business owner.
Use a competent tax preparer to prepare your business tax return.
Doing these three things will help you survive an IRS vehicle expense audit if you are unlucky enough to win the IRS audit sweepstakes!
If you find yourself being audited and need assistance, contact us. We can help.