The IRS requirement for personal auto mileage records

You drove your car on business trips. You made a report of how many miles you drove for business, the dates, the specific destination and the purpose of the trips. You have all the expense receipts for gas and other out-of-pocket expenses. You submitted the expense documentation to your employer who reimbursed you. This is a valid tax-deductible business expense for the employer, right?

Maybe not, according to the IRS. Following is an opinion directly from IRS appeals office. The bold type and underline is added for emphasis in this discussion.

Section 274(d) prescribes more stringent substantiation requirements before a taxpayer may deduct certain categories of expenses, including expenses related to the use  of listed property as defined in section 280F(d)(4). See- Sarifi;rd v. Commissioner, 50 TC. 823, 827 (1968), afd, 412 F 2d 201 (2d Cir.1969). As relevant here, the term “listed property” includes passenger automobiles. Sec.  280F  (d)(4)(,4)(i).  To satisfy the requirements of section 274(d), a taxpayer generally must maintain records and documentary evidence which, in combination, are sufficient to establish the amount, the date, and the business purpose for an expenditure or business use of listed property. Sec. l.274-5T (b)(6) Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6,1985).

When a taxpayer uses a vehicle for personal as well as for business purposes, he or she must allocate expenses between personal and business use in accordance with the strict substantiation requirements of section 274(d). Sec. 280F(d)(4)(,4)( i); sec. l .274-5T(d)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46025 (Nov. 6, 1985).

The Cohan rule, which allows the courts to estimate the amount of a taxpayer’s expenses when adequate records do not exist, does not apply for the expenses covered by the substantiation mies of Sec. 274(d) Temp. Reg.§ l .274-5T(a)(l ).

In other words, IRS is saying that if the taxpayer cannot document the total business use and the total personal use of the vehicle, then none of the expenses are tax-deductible. This is important because very few taxpayers keep records of their total mileage driven for personal purposes during the year. Considering that IRS examinations may occur years after a taxpayer has disposed of an automobile and the related records of the car, there might not be any physical evidence of mileage.

As a final insult to injury, IRS say that the taxpayer is not entitled to reasonably estimate the facts. Notice that the “strict substantiation requirements” mean that the taxpayer is not entitled to estimate total miles driven for personal purposes.

I am currently working on a client’s tax return examination where all of the travel expenses related to personal auto were denied because the taxpayer is unable to document the total mileage driven for non-business purposes on his personal automobile. While the client may be able to prevail over this IRS opinion in tax court, the cost of bringing the matter to tax court would likely exceed the recoverable amount.

In another client situation, a minority share business owner who is reimbursed for miles driven declines to provide her employer’s accountant with records of personal miles driven because she considers this to be private and personal. The IRS is not satisfied and I expect the deduction to be denied. The business taxpayer will owe additional taxes, penalties and interest.

I recommend that everyone who might deduct travel expenses related to their personal automobile on a business tax return should use an automated cell phone app that documents the miles driven over the course of the year. I use MilesIQ.


One response to “The IRS requirement for personal auto mileage records”

  1. Patti Carey Avatar
    Patti Carey

    Great suggestion! So many clients don’t keep adequate records of the miles driven for work.

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