When it comes to your tax records, there’s one record that you really must keep, and it’s easily overlooked. It’s the mileage log. In an IRS audit, the mileage log often creates the first impression of your tax records, and not having a good log is the biggest unpardonable sin of an IRS audit. Whether you use the IRS mileage rate method or the actual expense method, you need a written record that proves your business percentage of use.
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.
Do as the Tax Form Says
Regardless of the type of business entity, the tax return includes a tax form that asks for the following information about the vehicles:
- Do you have evidence to support the business/investment use claimed? (If “yes,” is the evidence written?)
- List your total business/investment miles on each vehicle.
- List your total commuting miles on each vehicle.
- List your total personal miles on each vehicle.
IRS Form 4562 has columns for answers to the above questions for up to six vehicles.
The mileage log is the record of proof needed to answer these questions.
Do What the Audit Would Require
It is good to know what information the IRS requires you to provide related to that tax form:
- Send copies of repair receipts, inspection slips, and other records showing total mileage for the year.
- Send copies of logbooks and other records to support the business mileage claimed.
- Provide a copy of your appointment book or calendar of business activities for the year.
- 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.
- 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 the logbook;
- a match of the inspection slip odometer reading with the mileage in the logbook;
- the mileage between repair stops, to see whether that ties in with the claimed mileage; and
- a business purpose that ties in with your appointment book or other calendar of business activities.
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. An IRS audit can 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.