Not all tax deductions are created the same. If you dread the thought of being audited by the IRS, you should know – and of course avoid at all cost – the triggers that beckon the agency. As guaranteed by law, you are entitled to mileage deduction on all business-oriented driving expenses. But mileage tax deduction is one of the most notable types of tax write offs that are prone to IRS audits. That in itself isn’t surprising. Thousands of Americans are faced with IRS audits each year over flimsy discrepancies in mileage deductions.
It’s undeniable that cases of IRS targeting mileage deductions are on the rise. What bugs most business owners are the reasons behind the increase. Here, I am going to walk you through top reasons why mileage deduction is a haven for IRS audits.
Time Factor: Too Busy?
As the business environment and workplace continue to be tighter, business owners have little or no time to update their expense ledgers. IRS knows that, and they want to build a case against you. With that, many small businesses and self-employed people fall for this trap because they simply don’t have time left from their daily routine to balance their books – to reconcile bank statements and perform simple accounting exercises.
Think about it -most small business owners and self-employed individuals log many hours doing what matters to their business – installations, repairs, driving, mowing, and much more – as and when do they get time and energy to make daily expense entries? As arduous as it is, accounting and bookkeeping are not vocational in themselves.
When tax season arrives, business owners find themselves between a rock and a hard place. Without proper documentation and evidence to back their tax deduction claims, they are poised to make innocent errors here and there. Did they drive 500 miles that week or 800? Depending on memory and a wad of receipts isn’t going to cut it. There is bound to be some discrepancies in your files. And the mileage deduction conundrum doesn’t end there.
Nature of Business
Small business owners and self-employed are poised to make errors in their entries of expenses. Unlike their wage earner counter-parts, their expenses, income, and other bookkeeping aspects are not tracked formally. Salaried people receive W-2s, which are cogent and easy to work with at the end of fiscal year.
As if that isn’t bad enough, small business owners are bound to self-report. Apart from form 1099, their financial reports are based on the cliché “honor code” system. Think the IRS trusts you? Think again; that is the inherent reason why mileage deductions are always slapped with an IRS audit.
Be sure you have a mileage log that supports your mileage claims. If you choose to utilize the Standard Deduction – you will need a log that fulfills the IRS’s requirements for a mileage log.