Monday, December 27, 2010

Happy New Year, time to change your oil!

As I’ve written previously, we defend a lot of people that have been selected by IRS for examination. Sometimes these exams go well, particularly if the taxpayer has tight records and good explanations, and other times it’s more difficult, such as when documentation is spotty, or the explanations defy logic.

Our office is good at dealing with these issues, but recently we were surprised by an audit that had tight records, good explanations, and still is a struggle. The case involves automobile deductions for a business.

Most of you are (or should be) aware of the IRS’ requirement that business auto use be substantiated by contemporaneous records, commonly referred to as a logbook. The log should show business and personal use, and these records are the basis for determining how much of the cost of the auto can be deducted. The regulations require the log be kept by the taxpayer on a current basis, not constructed after the fact.

An IRS agent we are dealing with in the Long Beach office has a different take on the use of a logbook. Our client in question DID keep a log book (really!) and DID document his costs for the auto. He also wrote down the odometer readings at the beginning and end of the year in question in order to determine a percentage of business use. So far, so good, and this effort probably puts him in the top 5% of taxpayers in terms of documentation.

However, our agent has decided that the odometer readings must be corroborated by an outside third party! In our case the taxpayer maintained the vehicle himself or had friends do his service and repairs, and he has no independent service records showing odometer readings as of Jan.1 or Dec 31. This apparently is enough for the IRS agent to disregard the logbook and arbitrarily disregard the taxpayer’s calculations. Nowhere in the Code or Regulations is there a requirement for annual independent third party corroboration of odometers, yet our agent is insisting.

Unfortunately for our client this delays concluding the exam and creates unnecessary angst for the taxpayer. The IRS agent’s position will be unsustainable if we take it to Appeals, but in the meantime the poor taxpayer must deal with the stress and costs of an unresolved IRS audit.

So, in order to protect you from egregious interpretations of the law such as this one, my advice to you: Take your business vehicles in to a garage and get them serviced in the next week or two, and keep the service receipt that shows the odometer reading.

It’s an easy way to protect you from overzealous auditors.

1 comment:

Rich said...

I am just guessing here, that the subject Long Beach agent has a superior. No, not “attitude”, but boss.
My simpleminded logic would direct me to address this agent’s “personal version” of the code and regulations, with his boss.

Too many comments, these days, begin with “in this economy”. However, “in this economy” having to get your vehicles professionally serviced to pacify a rogue agent might be an undue burden on a taxpayer or his business.
Granted that the cost of such professional servicing might be an allowable business deduction, but multiples of such, might pose a cash flow problem if the fleet of business vehicles was of significant size.
In some businesses, using an employee to perform in-house oil changes during lulls in business, might make the difference in that employee being full time, part time or employed at all.

I understand that the work-around solution, to the self-authored demands of a obstinate IRS agent, might include documented professional servicing. In the interest of keeping with the law, I’d prefer not appeasing him, but rather redirecting him. All the while, knowing that it would probably only make him look harder elsewhere for spite.

However, it’s fair to note that Eliot Spitzer chose the path of professional servicing. It’s true that it cost him the NY governor’s office, but it did land him a job on CNN. Ultimately, as the ratings indicate, that’s not going to work out so well either.