By Matt Porter
The tax attorneys at Nardone Law Group in Columbus, Ohio routinely assist individuals and businesses that become subject to an IRS audit or examination. Keeping adequate records is one of the most important things a taxpayer can do to avoid a potential IRS audit or examination, and ensure that an IRS audit or examination does not result in an assessment of additional tax, penalties, and interest. An IRS audit or examination occurs when the IRS selects a tax return to review the taxpayer’s records from which the information that is reported on the tax returned is derived. IRS revenue agents are typically the employees within the IRS who audit and examine tax returns. Below is a United States Tax Court case example of a taxpayer that did not keep proper records and documents of his car and truck expenses and, therefore, could not successfully defend against the IRS audit and examination.
Sharriff M. Dyer v. Commissioner: Mortgage Broker Failed to Substantiate Business Use of Automobile During IRS Audit and Examination
In Sharriff M. Dyer v. Commissioner (full case opinion linked), the United State Tax Court denied a mortgage broker and real estate management company owner’s deductions above the amounts that the IRS determined during the audit and examination for expenses relating to automobiles he used for both business and personal purposes. The taxpayer did not sufficiently substantiate the car and truck expenses pursuant to I.R.C. § 274 (d). The Taxpayer failed to keep a contemporaneous mileage log or other adequate records and instead relied on vague testimony and general daily planners. The taxpayer’s records, or lack thereof, did not contain adequate business purposes or geographic information from which total number of miles driven could be determined. Because of § 274(d)'s strict rules, the Tax Court held that the taxpayer could not estimate the car and truck expenses and denied the additional car and truck expenses claimed over the amount the IRS allowed during the audit and examination of the taxpayer’s income tax returns.
The lesson to be learned from Sharriff M. Dyer v. Commissioner is that a taxpayer must keep adequate books and records to substantiate income, deductions, losses, and credits reported on his tax return. If not, the IRS will reconstruct these items during the audit and examination using a variety of methods. When the IRS questions expenses relating to business use of automobiles during an audit or examination, a taxpayer must substantiate with adequate records: (1) the amount of each separate expense; (2) the mileage for each business use of the automobile and the total mileage for all purposes during the taxable period; (3) the date of the business use; and (4) the business purpose of the use. In the absence of adequate records, such as an account book, a diary, a log, a statement of expenses, trip sheets, or a similar record, a taxpayer may substantiate expenses for mileage with sufficiently detailed written or oral statements and other collateral evidence establishing that the expense was incurred. The taxpayer in Dyer failed to keep a contemporaneous driving log or any other document which established the amount of miles driven, the mileage for each purported business use of his vehicles, the date of the trips, or a specific business purpose.
A taxpayer bears the ultimate burden to prove that an IRS revenue agent’s methods during the audit and examination are unfair or inaccurate. When a taxpayer fails to maintain adequate records to support items of income, deductions, losses, and credits, as the taxpayer failed to do in Dyer, the IRS’s conclusions made during the audit and examination are much more likely to stand in Tax Court.
Contact Nardone Law Group for IRS Audit or Examination Representation
Nardone Law Group represents individuals and businesses in federal tax issues, including those who have become subject to an IRS audit or examination. If you are facing an IRS tax audit or examination or are interested in learning how to keep adequate records to substantiate items contained in your federal tax return to avoid an IRS audit or examination, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients in IRS audits and examinations. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available during or after the IRS audit or examination, including the Offer in Compromise, or the Fresh Start program. Contact us today for a consultation to discuss your case.