Keeping track of business mileage can be a hassle, but it's crucial for anyone who uses their vehicle for work-related purposes. Inaccurate mileage logs can lead to problems with the IRS, as one taxpayer recently discovered in a Tax Court case. The case demonstrates why accurate mileage logs are essential and highlight the consequences of failing to keep correct records.
The Case of Patrick Whittington
Patrick Whittington is a licensed insurance agent who works for various insurance companies. He uses his car to travel to client meetings and frequently travels between offices to attend meetings and training sessions. In 2016, Whittington claimed a deduction for business mileage on his tax return. However, he did not keep a written record of his mileage, relying instead on Google Maps and his memory to estimate the distance he had traveled.
The IRS disallowed Whittington's mileage deduction and assessed additional taxes, penalties, and interest. Whittington contested the IRS's decision in Tax Court, arguing that his estimates were accurate and that he had made a good-faith effort to document his business mileage.
The Tax Court's Decision
The Tax Court sided with the IRS, ruling that Whittington's estimate of his business mileage was not credible. The Court noted that Whittington had not kept a contemporaneous mileage log, the best evidence of the distance a taxpayer has driven for business purposes. The Court also observed that Whittington's estimates needed to be more consistent with the distances he had reported on his prior tax returns.
The Court stated that the taxpayer has the burden of proving that they are entitled to the deduction claimed. The taxpayer must substantiate the amount and purpose of the expense claimed. Without corroborating evidence, the taxpayer's testimony is generally insufficient to establish the taxpayer's entitlement to a deduction.
In Whittington's case, the Court found that the taxpayer had not met his burden of proof. The Court observed that Whittington needed to maintain an adequate mileage log and had not presented any other credible evidence to support his claim for a mileage deduction.
The Consequences of Failing to Keep Accurate Records
Whittington's case demonstrates the consequences of failing to keep accurate records. Inaccurate mileage logs can lead to a disallowed deduction and additional taxes, penalties, and interest. Sometimes, the IRS may impose a negligence penalty of up to 20% of the tax owed.
In addition to the tax consequences, inaccurate mileage logs can damage a taxpayer's credibility in the eyes of the IRS. The IRS must ensure taxpayers are paying the correct amount of taxes. It may be more likely to scrutinize a taxpayer's returns if the taxpayer has a history of inaccurate or incomplete records.
The Importance of Real Mileage Logs
Whittington's case also highlights the importance of maintaining an accurate mileage log. A contemporaneous mileage log is the best evidence of the distance a taxpayer has driven for business purposes. The record should include the date of the trip, the starting and ending points, and the purpose of the trip.
There are several ways to keep a mileage log. One standard method is to use a paper logbook, in which the taxpayer records the relevant information by hand. Another option is to use a mileage-tracking app, which can automatically record the relevant information based on GPS data.
Regardless of the method used, it's essential to keep the log up-to-date and accurate is vital. The log should be completed during each trip or as soon as possible to ensure the information is fresh in the taxpayer's mind. It's also important to be consistent in how the data is recorded and to avoid any ambiguity in the purpose of the trip or the starting and ending points.
Some taxpayers may be tempted to estimate their mileage instead of keeping a log, especially if they occasionally use their vehicles for business purposes. However, as Whittington's case demonstrates, calculating mileage is risky. The IRS expects taxpayers to keep accurate records of their business mileage, and more than casual estimates may be required to satisfy the agency's requirements.
In addition to keeping an accurate mileage log, taxpayers should also be aware of the IRS's rules regarding the deductibility of business mileage. In general, the IRS allows taxpayers to deduct the actual expenses of using their vehicle for business purposes or a standard mileage rate that is adjusted annually. However, taxpayers must meet specific requirements to claim the deduction, including maintaining adequate business mileage records.
Whittington's case is a reminder of the importance of keeping accurate business mileage records. Inaccurate mileage logs can lead to problems with the IRS, including disallowed deductions, additional taxes, penalties, and interest. By contrast, maintaining an accurate mileage log can help taxpayers substantiate their deductions and avoid potential problems with the IRS. Taxpayers who use their vehicles for business purposes should take the time to establish a system for keeping a mileage log, whether it's a paper logbook or a mileage-tracking app. By doing so, they can help ensure that they are claiming the correct deductions and avoiding potential problems with the IRS.