judas_priest
10-29-2010, 04:39 PM
Well, here goes. The first tip is in the area of deducting vehicle expenses, but I do have a foreword. Those who think the government should be run more like a business should be championing a large increase in funding for the IRS. Studies have shown that increasing the number of employees involved in scrutinizing tax returns will likely result in generating more income that it will cost. (At the margin it would be several times the cost).
The IRS has been cash starved for a long time - their computer systems were out-of-date, they did not have the manpower to do effectively scrutiny, etc. But Congress, after using the IRS as a political football for years, has begun to recognize the problem. The IRS has been adding examiners and auditors, so there ill be increased efforts at compliance. This hiring pattern began several years ago, and the people they hired are now getting to the point of actually knowing what they are doing. A word to the wise . . .
One of the areas that is getting a lot of increased attention is automobile expenses. Things you could have gotten away with 5 years ago may get you in trouble now.
This document is excerpted from a much long training manual for beginning tax preparers. It is written for them and I haven’t changed the voice I used in writing it. It was written several years ago, hence the entry for tax year 2008, but that could happen again, so I left it in.
The fundamental rule is that many kinds of deductions and/or credits require “written” records. If you do not see the records themselves, the client will have to sign a declaration that they have such written records and that the numbers the have provided you are an accurate reflection of those records. That’s right, we can no longer take the taxpayer’s declaration about a number of items. In the case of mileage it used to be enough if the client told us (s)he had records – now we have to see them or have the client sign the certification. The certifications will likely (pending IRS regulations) need to list the kinds of records the taxpayer has. [As far as I can tell, there are as yet no regulations on this]
In the process the taxpayer has to be informed of the negative consequences of certifying falsely. At the time of this writing I am not sure whether criminal penalties involved, and at least there could be severe civil penalties (legalese for, “It’s a fine but we’re not going to call it that.”) This information should be on the certification itself, so they can’t claim they weren’t given the information.
What constitutes a “written” record.? Almost anything physical or electronic can be. The law says that [in most cases] the records have to be made contemporaneously, which means made more or less at the time the activity took place. This almost certainly is not restricted to the exact time, but it would likely not include figuring it out at the end of the year or the quarter, unless all that is happening is reducing original records to a more usable form – but the Taxpayer should have - and keep - the originals.
An Example: Auto mileage
Why this matters: Auto expenses are deductible on Schedule C (sole proprietorship) and Forms 1065 (partnership), 1120S (subchapter S corporations) and 1120C (C corporation) business returns, as the full federal reimbursement rate. This is currently $.50 a mile, so it can really add up. [The taxpayer can also use actual car expenses but these are outside the scope of this section. The actual expense method must be used if taxpayer operates a number of vehicles simultaneously or used this method for the first year a vehicle was placed into service.] The Taxpayer can also deduct this full federal rate on Schedule E (rental income), Form 2106, Schedule F (Farm) and a number of others. Taxpayers can also deduct mileage (at a lesser rate) for trips for medical purposes, for certain charitable purposes (including dropping used stuff off at Goodwill, Salvation Army, etc.), recognized moving expenses.
Clearly the “best” record of mileage is a detailed logbook, stating the beginning and ending mileage for each deductible trip, along with information about the purpose of the trip. But there are other ways of recording this information. A notation the number of miles for a trip would work. But remember, the forms ask for mileage at the beginning and end of the year, and commuter miles. {JP’s editorial comment: The best way of getting beginning and ending mileage for the year is to make a habit of writing down the odometer reading each December 31. It gives you the end mileage for that year, as well as the beginning mileage for the next.} Fortunately the commuting miles are not critical, but if your client wants to claim the interest paid on a car used for business, the total miles will be important. Even if the taxpayer intends – or needs – to claim actual expenses, (s)he will still need the mileage unless 100% of the vehicle usage is business. This is hard to establish (Well, yes, I guess a did pick up a few groceries on the way home. Yes, I did commute.) Also, if the taxpayer drives only to a limited number of destinations, simply recording the fact of the trip suffices.. Either they will have measured the mileage and written it down, or you can look it up. Thank you, MapQuest.
As far as “contemporaneous” is concerned, a taxpayer’s noting the mileage at the end of the week is fine, so long as they can establish how they noted the information.
You can also use MapQuest (or any other similar program) for lots of trips, but if you have to look up the mileage for a significant number of trips, remember to note the time you spent – you may need to add an accounting fee. Find out what your office policy is on this and how much to charge. {Message to taxpayers – you don’t want to pay your tax person for work that you could have done easily for yourself}
What happens if the taxpayer hasn’t written down the trip? If there is no objective record of the trip, the taxpayer is likely SOL. But objective contemporaneously made records cover more than a mileage log. Consider the case of a Realtor. (S)he comes in with no mileage records. “Oh, I though I could just approximate it. That’s what I’ve always done.” Not any longer. If there are no records, the person has just lost out on thousands of dollars of expenses from the Schedule C. But all is not lost. You ask the Realtor if she has an appointment book. “Oh, yes, I write down every appointment I make. I also keep a record of which properties I have checked out or shown.” Saved. The appointment book is a contemporaneously made record, as would be a separate log of the houses visited and the dates were noted if they were not in the appointment book. These can be processed through MapQuest, and she keeps the deduction for expenses on the Schedule C.
What else can be a “written record?” Let’s say a taxpayer made an out of town trip, using his/her car to get there. No record of the miles, no appointment book. But there is a receipt from a hotel showing a three night stay. Well, there you have it. (That might be iffy at an audit, but it’s enough for the return. But if it was a sales trip and the taxpayer has sales slips for that location and time, then it’s all good) It’s contemporaneous and it’s written. Generally speaking, anything that is the result of some process which records transactions or information more or less at the time they come into existence will satisfy the requirement. The critical thing is that the evidence not come solely from the memory of the taxpayers and the records upon which the deduction or credit are based come from the time period.
Another important issue is recording the business purpose. I attend a weekly business breakfast. So the meals can be deducted (only 50%), actually, and I can also claim the mileage. Do I write this down? No, but it shows up on my credit card statement, those meetings are the only time I eat there, it’s always on a Wednesday, and there is a sign-in sheet, so I can always go back and get the business purpose. Others may not be so lucky (and, of course, I rely upon those sign-in sheets and the certificates of continuing education that the association issues). But a charge slip for, say, a meal will likely need some method of establishing the business purpose.
NOTE: For the 2008 tax year, there is an added fillip to mileage issues. The IRS ordinarily determines in the fall what the allowance is for mileage for the succeeding year. On some occasions, large changes in the price of gas lead to mid-year adjustments in this allowance. For business miles, the figure went up as of July 1. For the first half of the year the allowance is the previously announced $.505 (50.5¢). For miles beginning July 1, 2008, this figures rises to $.585 (58.5¢). Remember to see if the mileage can be allocated by date – you’ll need some good records to do this. But if the TP’s use of the vehicle for business purposes was mostly after July 1, it could make a significant difference.
Think about other things that could meet these requirements. When you confront other items for which records are required, ask yourself what else would satisfy these requirements.
2010
For 2010, the standard mileage rate for the cost of operating your car for business use is 50 cents per mile.
Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Medical- and move-related mileage. For 2010, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 16.5 cents per mile.
See Transportation under What Medical Expenses Are Includable in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses..
Charitable-related mileage. For 2010, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.
http://www.irs.gov/formspubs/article/0,,id=178004,00.html
One last warning: I know that a lot of people “create” these records after the fact. (I once prosecuted case which turned on whether a particular record was created at the time or after the fact.) If I think that records are fabricated, I won’t use them (and I likely will fire the client). I do have a story for you. A taxpayer was audited for his business travel. The meeting took place several years down the line. (the year in question was 2007 and the audit was in 2010) He came in with a diary. It looked right. It was worn and dog-eared. There were some food stains here and there. The entries were written with different pens and pencils. The quality of the writing varied, but it was still all done by the same person. The examiner picked it up and looked at the title page of the book. It was copyright 2009. Deductions disallowed. Penalty imposed.
The IRS has been cash starved for a long time - their computer systems were out-of-date, they did not have the manpower to do effectively scrutiny, etc. But Congress, after using the IRS as a political football for years, has begun to recognize the problem. The IRS has been adding examiners and auditors, so there ill be increased efforts at compliance. This hiring pattern began several years ago, and the people they hired are now getting to the point of actually knowing what they are doing. A word to the wise . . .
One of the areas that is getting a lot of increased attention is automobile expenses. Things you could have gotten away with 5 years ago may get you in trouble now.
This document is excerpted from a much long training manual for beginning tax preparers. It is written for them and I haven’t changed the voice I used in writing it. It was written several years ago, hence the entry for tax year 2008, but that could happen again, so I left it in.
The fundamental rule is that many kinds of deductions and/or credits require “written” records. If you do not see the records themselves, the client will have to sign a declaration that they have such written records and that the numbers the have provided you are an accurate reflection of those records. That’s right, we can no longer take the taxpayer’s declaration about a number of items. In the case of mileage it used to be enough if the client told us (s)he had records – now we have to see them or have the client sign the certification. The certifications will likely (pending IRS regulations) need to list the kinds of records the taxpayer has. [As far as I can tell, there are as yet no regulations on this]
In the process the taxpayer has to be informed of the negative consequences of certifying falsely. At the time of this writing I am not sure whether criminal penalties involved, and at least there could be severe civil penalties (legalese for, “It’s a fine but we’re not going to call it that.”) This information should be on the certification itself, so they can’t claim they weren’t given the information.
What constitutes a “written” record.? Almost anything physical or electronic can be. The law says that [in most cases] the records have to be made contemporaneously, which means made more or less at the time the activity took place. This almost certainly is not restricted to the exact time, but it would likely not include figuring it out at the end of the year or the quarter, unless all that is happening is reducing original records to a more usable form – but the Taxpayer should have - and keep - the originals.
An Example: Auto mileage
Why this matters: Auto expenses are deductible on Schedule C (sole proprietorship) and Forms 1065 (partnership), 1120S (subchapter S corporations) and 1120C (C corporation) business returns, as the full federal reimbursement rate. This is currently $.50 a mile, so it can really add up. [The taxpayer can also use actual car expenses but these are outside the scope of this section. The actual expense method must be used if taxpayer operates a number of vehicles simultaneously or used this method for the first year a vehicle was placed into service.] The Taxpayer can also deduct this full federal rate on Schedule E (rental income), Form 2106, Schedule F (Farm) and a number of others. Taxpayers can also deduct mileage (at a lesser rate) for trips for medical purposes, for certain charitable purposes (including dropping used stuff off at Goodwill, Salvation Army, etc.), recognized moving expenses.
Clearly the “best” record of mileage is a detailed logbook, stating the beginning and ending mileage for each deductible trip, along with information about the purpose of the trip. But there are other ways of recording this information. A notation the number of miles for a trip would work. But remember, the forms ask for mileage at the beginning and end of the year, and commuter miles. {JP’s editorial comment: The best way of getting beginning and ending mileage for the year is to make a habit of writing down the odometer reading each December 31. It gives you the end mileage for that year, as well as the beginning mileage for the next.} Fortunately the commuting miles are not critical, but if your client wants to claim the interest paid on a car used for business, the total miles will be important. Even if the taxpayer intends – or needs – to claim actual expenses, (s)he will still need the mileage unless 100% of the vehicle usage is business. This is hard to establish (Well, yes, I guess a did pick up a few groceries on the way home. Yes, I did commute.) Also, if the taxpayer drives only to a limited number of destinations, simply recording the fact of the trip suffices.. Either they will have measured the mileage and written it down, or you can look it up. Thank you, MapQuest.
As far as “contemporaneous” is concerned, a taxpayer’s noting the mileage at the end of the week is fine, so long as they can establish how they noted the information.
You can also use MapQuest (or any other similar program) for lots of trips, but if you have to look up the mileage for a significant number of trips, remember to note the time you spent – you may need to add an accounting fee. Find out what your office policy is on this and how much to charge. {Message to taxpayers – you don’t want to pay your tax person for work that you could have done easily for yourself}
What happens if the taxpayer hasn’t written down the trip? If there is no objective record of the trip, the taxpayer is likely SOL. But objective contemporaneously made records cover more than a mileage log. Consider the case of a Realtor. (S)he comes in with no mileage records. “Oh, I though I could just approximate it. That’s what I’ve always done.” Not any longer. If there are no records, the person has just lost out on thousands of dollars of expenses from the Schedule C. But all is not lost. You ask the Realtor if she has an appointment book. “Oh, yes, I write down every appointment I make. I also keep a record of which properties I have checked out or shown.” Saved. The appointment book is a contemporaneously made record, as would be a separate log of the houses visited and the dates were noted if they were not in the appointment book. These can be processed through MapQuest, and she keeps the deduction for expenses on the Schedule C.
What else can be a “written record?” Let’s say a taxpayer made an out of town trip, using his/her car to get there. No record of the miles, no appointment book. But there is a receipt from a hotel showing a three night stay. Well, there you have it. (That might be iffy at an audit, but it’s enough for the return. But if it was a sales trip and the taxpayer has sales slips for that location and time, then it’s all good) It’s contemporaneous and it’s written. Generally speaking, anything that is the result of some process which records transactions or information more or less at the time they come into existence will satisfy the requirement. The critical thing is that the evidence not come solely from the memory of the taxpayers and the records upon which the deduction or credit are based come from the time period.
Another important issue is recording the business purpose. I attend a weekly business breakfast. So the meals can be deducted (only 50%), actually, and I can also claim the mileage. Do I write this down? No, but it shows up on my credit card statement, those meetings are the only time I eat there, it’s always on a Wednesday, and there is a sign-in sheet, so I can always go back and get the business purpose. Others may not be so lucky (and, of course, I rely upon those sign-in sheets and the certificates of continuing education that the association issues). But a charge slip for, say, a meal will likely need some method of establishing the business purpose.
NOTE: For the 2008 tax year, there is an added fillip to mileage issues. The IRS ordinarily determines in the fall what the allowance is for mileage for the succeeding year. On some occasions, large changes in the price of gas lead to mid-year adjustments in this allowance. For business miles, the figure went up as of July 1. For the first half of the year the allowance is the previously announced $.505 (50.5¢). For miles beginning July 1, 2008, this figures rises to $.585 (58.5¢). Remember to see if the mileage can be allocated by date – you’ll need some good records to do this. But if the TP’s use of the vehicle for business purposes was mostly after July 1, it could make a significant difference.
Think about other things that could meet these requirements. When you confront other items for which records are required, ask yourself what else would satisfy these requirements.
2010
For 2010, the standard mileage rate for the cost of operating your car for business use is 50 cents per mile.
Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Medical- and move-related mileage. For 2010, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 16.5 cents per mile.
See Transportation under What Medical Expenses Are Includable in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses..
Charitable-related mileage. For 2010, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.
http://www.irs.gov/formspubs/article/0,,id=178004,00.html
One last warning: I know that a lot of people “create” these records after the fact. (I once prosecuted case which turned on whether a particular record was created at the time or after the fact.) If I think that records are fabricated, I won’t use them (and I likely will fire the client). I do have a story for you. A taxpayer was audited for his business travel. The meeting took place several years down the line. (the year in question was 2007 and the audit was in 2010) He came in with a diary. It looked right. It was worn and dog-eared. There were some food stains here and there. The entries were written with different pens and pencils. The quality of the writing varied, but it was still all done by the same person. The examiner picked it up and looked at the title page of the book. It was copyright 2009. Deductions disallowed. Penalty imposed.