Should I Keep a Milage Log for Tax Purposes?
One of the top questions I ask is whether it’s really necessary to keep a mileage log for those business deductions. The eye roll and the sense of trepidation is very real, and I understand it. But yes – the tl;dr of this article is that you need to keep a mileage log. Let’s unpack that advice a little.
At the end of the day, it’s up to you. You can keep a log, or:
- You can spend a lot more time with the IRS when you present an inadequate log of your business mileage.
- You can spend excessive time re-creating a mileage log that looks really good but will fail.
- If you fail to keep a mileage log or other record that proves your business mileage and the IRS catches up with you, you will deduct less than your real business mileage and you might end up with no vehicle deductions.
Who needs a log?
- Proprietors need a mileage log.
- A corporate owner-employee needs a mileage log and needs to submit it to the corporation.
- The tax code forbids the IRS from giving you vehicle deductions when you fail to keep adequate records of your business mileage.
- The tax code forbids the courts from giving you vehicle deductions when you can’t prove your mileage.
So if you stop reading here, let me share the Golden Rule: Keep a mileage log.
Let’s look at a case of fraud
I’ll try to keep your attention, who doesn’t like to read about a little fraud? In Flake, the IRS asserted income tax deficiencies of $16,240 and $58,094 and fraud penalties of $12,180 and $43,571.
In this case, the court had to decide:
- if Jim and Martha Flake were entitled to deduct car and truck expenses greater than the IRS allowed,
- if they were liable for tax fraud penalties, and
- (in the alternative to the fraud penalties) whether Jim and Martha were liable for accuracy-related penalties.
An IRS revenue officer audited the Flakes’ tax returns, requested certain documentation, and met with Jim and Martha at their residence every two weeks until the examination ended about a year later.
During the audit examination, Jim and Martha provided odometer readings, credit card statements, fuel receipts, appointment book notes, and invoices as well as reconstructed calendars based on these documents. They asserted that these records met the heightened and strict substantiation requirements required by the Code for vehicle deductions and that, accordingly, they were entitled to their full vehicle deductions.
The Problem: Section 274(d)
Before Section 274(d), you could estimate your business mileage and the IRS and the courts could accept your estimates.
Section 274(d) did away with estimates of business mileage. That means that the courts may not estimate your vehicle deductions. Today, you need to substantiate the amount of your mileage, your time, and the purpose of each use. I tell my clients, capture the who, what, when, where, and why.
Jim and Martha got what the IRS said their vehicle deductions should be in court because:
- The court did not find the calendars reliable or helpful in establishing Jim and Martha’s car and truck expenses.
- Jim and Martha failed the adequate records requirement because they did not establish mileage, time, and purpose of each car and truck use.
- The IRS’s allowance of mileage was correct. Jim and Martha get nothing more than the IRS allowed.
The Juicy Stuff: Fraud
Jim and Martha accumulated in a fireproof box a cash reserve of at least $177,000 during the 20 years before the audit. They likely triggered the audit when they took that $177,000 from their fireproof box and deposited it in the bank.
Key point. Tax law and the Bank Secrecy Act require information reporting of most cash deposits and cash payments in excess of $10,000.
Key point. They created their mileage records after the fact during the IRS audit.
Key point. They only used odometer readings.
The mileage in the submitted records contained math errors and did not tie to the tax return.
In court the IRS asserted that Jim and Martha had to have fraudulently underreported their taxable income in order to have accumulated $177,000 in cash reserves. The court disagreed and found that Jim and Martha accumulated this cash because they were frugal.
The court also noted that in spite of the IRS’s biweekly audit visits with Jim and Martha at their home for almost a year, the IRS failed to present clear and convincing evidence of fraud. Accordingly, the court did not assess the fraud penalty.
But the Flakes were not so lucky on the accuracy penalty. The court ruled that Jim and Martha were liable for the 20 percent accuracy penalty because they had failed to know the law and to keep accurate records of, among other things, their vehicle deductions.
- To cut your chances of visiting with the IRS, don’t make large cash deposits in a U.S. bank. (Checks are fine; cash is the problem.)
- Keep a mileage log to prove your business mileage.
- Employ a professional to help with your taxes.
Operate your business as a business with business books, checks, records, and receipts that prove your business income and expenses. You want to follow the five steps above so that you don’t have to do as Jim and Martha did—visit with an IRS agent every two weeks for almost a year and then have to go to court hoping to overcome the IRS assertions so that at least some of your deductions survive.