How Schedule C Taxpayers Can Avoid Mileage Audits by the IRS?

“Once the IRS starts looking into your accounts, it never stops until it finds a mistake.”

This is a common anecdote among Schedule C taxpayers caught in the spotlight by the Internal Revenue Service (IRS).

To avoid IRS mileage audits, you should always log your mileage correctly using a reliable mileage tracker application and then store the documents properly in the digital format.

These documents can become your evidence in case the IRS comes calling.

The IRS is specifically keen on checking the mileage costs that have been written off against tax by business owners under Schedule C.

Why Are Schedule C Taxpayers Targeted for IRS Mileage Audits?

Despite its limited resources that can be used to verify the veracity of the information filed by the taxpayers in the tax return forms, the IRS conducts routine audits on Schedule C taxpayers.

Below are some of the reasons why this category of taxpayers is of interest to the IRS.

Schedule C Taxpayers Lack the Necessary Expertise

Self-employed taxpayers often don’t have the resources to hire a tax expert to help them file the returns.

Since small business owners are generally in charge of running the business, they lack the time and the expertise to file the contemporaneous documents that are used to substantiate the mileage claims.

The examples of taxpayers under the Schedule C category are usually business owners who are engaged in:

  • ridesharing
  • plumbing
  • trucking
  • landscaping
  • installations
  • masonry
  • roofing
  • building

They work hard, long hours and are left with little or no time for bookkeeping.

The IRS will, therefore, want to verify the balance sheet and bank statements of this category of taxpayers before accepting the mileage claims made on the tax returns.

These IRS Audit Techniques Guides and the video below can help business owners to prepare for the IRS tax audit:

Schedule C Taxpayers Are Sometimes Tempted to Overstate Expenses

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Despite knowing that overstating the expenses incurred when driving for business purposes is illegal, taxpayers under Schedule C are often hard-pressed for cash flow and sometimes tempted to exaggerate the expenses.

The IRS is fully aware of the temptation to pad the costs of running a vehicle and will pay particular attention to returns filed by these taxpayers.

It is also important to remember that wage earners get their paycheck after a fortnight or month and a copy of the paycheck is sent to the IRS through the social security administration.

This means that the tax authorities already know how much they have earned even BEFORE you file your tax returns.

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What Expenses Does the IRS Target in Mileage Audits?

The IRS is fully aware of the problem of padding expenses, especially when claiming for mileage.

There are certain classes of expenses that are a direct target of the IRS when conducting its audit. These include:

  • auto expenses,
  • mileage expenses,
  • meals, and
  • entertainment.

The IRS requires that you provide enough substantiation for the mileage that you are claiming because these expenses are the most likely to be exaggerated and they are also the most difficult to reconstruct.

To create proper records, use a smart mileage tracking app such as GOFAR.

The app helps you log your mileage as well as to find your engine’s sweet spot to teach you how you can drive better to save on your fuel cost and wear and tear related repairs.

Other areas where GOFAR can be helpful include:

  • Understanding engine fault codes and then translating the technical jargon into plain English
  • Helping you to drive better and save almost 10% on fuel costs
  • Automating mileage tracking and associated business expenses
  • A free and easy-to-install mileage logging app

Here’s a step-by-step guide explaining how to properly complete the IRS Schedule C form.

What Can You Do to Avoid IRS Mileage Audits?

Automate Your Appointment Records

There are so many tools online to help you automate your schedule.

You can, for example, use Google Calendar to create a digital format of your appointments.

The digital format will help you support your claims of the business errands to run throughout the year.

While you will not be required to send the appointment records when filing your returns with the IRS, the tax authorities will require that you provide supporting documents for your mileage claims.

In case there is an audit query about your mileage, you can always produce your electronic appointment calendar to help you prove your case.

Keep Chronological Contemporaneous Records

From the first day that you make your first business trip, the IRS will require you to keep a good record of the mileage covered.

The best way to go about this is to have a mileage application app that can automate your mileage logging task.

This will ensure that you have accurate records and that there is no missed mileage that you should have claimed.

The log will become your contemporaneous record to support your mileage claims.

Ensure You Can Reconstruct the Records Easily

If by bad luck you forget to switch on your mileage app, you will need your automated appointment records to reconstruct the miles that you travelled for business purposes but were not captured on the mileage tracking app.

Claim the Qualified Mileage Expenses ONLY

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Not all the mileage that you drive will be business-related and therefore an allowable deduction.

For example, you should not log your commute to and from work and then claim it when filing your returns.

While you can claim the mileage from your office to a client’s office, you are NOT allowed to claim the mileage from the client’s office to your home.

This is regardless of whether you went to the client’s office for business-related activities or personal reasons.

If you happen to drop in on a client on your way to a personal vacation, this will NOT qualify as a business mile.

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The test as to whether the miles driven qualify as business miles is to see if the business was the principal purpose of your trip.

Separate Commuting from Business Miles

The IRS considers commuting miles as personal expenses and therefore cannot be claimed for deduction against the tax.

You need to learn how to separate your commuting miles from your business miles. As a general rule, the first and the last drive from and to your home is considered commuting.

Any other trip that is business related during the day should be logged on the mileage tracking app.

Choose Rate That Is Applicable for Your Mileage

You can get the information on which mileage rates to apply for your business travelling expenses from the Internal Revenue Service website.

Remember that the rate applicable changes on a yearly basis as the prevailing economic conditions change.

If you want to calculate your total mileage deduction for past years, you should check on the IRS website to ensure you use the correct rate.

Keep the Documentation Safe

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Good practice, you should keep all your mileage documentation for at least three years from the day you file your returns.

The IRS may request additional documentation to substantiate your mileage deduction.

In such cases, you can always retrieve the documents that you kept safely to serve as your proof.

If You Can Afford It, Hire a Professional

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Sometimes the cost of filing your returns without the expert knowledge is more expensive than hiring a tax consultant to file your returns for you.

It is unlikely that returns filed by a professional will get the attention of the IRS.

If you feel that there is anything complicated about your taxes, it is always advisable to hire a professional tax consultant.

Remember – keeping impeccable records is critical for avoiding the IRS mileage audits and tax audits in general.

So, get your records automated with a mileage tracker and use all the help you need to minimise the risk of getting audited.

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