Audit Proofing Your Employee Business Expenses

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Photo by Kelly on Flickr.com

I recently attended the national conference of the National Association of Tax Preparers. It was easy to get to as it was in St. Louis this year. As much as I enjoyed taking the classes and meeting new people, sometimes the best information you get at these things is not in the actual classes, but in the scuttlebutt that you hear about what’s going on across the country. One of the issues that people were talking about was that the IRS has really stepped up the audits on Employee Business Expenses (Form 2106).

Just because certain types of forms might be susceptible to an audit doesn’t mean you shouldn’t claim legitimate deductible expenses on your tax return. If you are entitled to a deduction, you should take it. (Let me tell you, Warren Buffet’s not skipping out on his legal deductions). Just make sure you can back up your claims.

If you plan on claiming Employee Business Expenses on your tax return this year, the one thing you’re going to want is a copy of your company’s policy on employee reimbursements. If you get audited for your Employee Business Expenses, the first thing the IRS will ask you for is your official company policy on official company letterhead. If your company has a full reimbursement policy—you will automatically lose the audit. You may not claim a deduction for expenses that could have been reimbursed by your company.

Major companies like GM or Citibank will definitely have a policy. Smaller companies often don’t. To be honest, on more than one occasion I’ve written the reimbursement policy for a small company so they could submit something to the IRS when an employee was being audited. (Now that I think about it, I guess I should write one for my own company).

If you are claiming business mileage, you want to have a mileage log. This is the big IRS “gotcha” because so many people just guess a number and it’s wrong. For some reason, people seem to think that they drive 20,000 miles a year for business. Some people actually do. Some drive even more. But if you say that you drive 20,000 miles for business, you had better be able to back it up with a mileage log. For one thing, “20,000” is like a guaranteed audit flag. If you keep a mileage log, all you have to do is just whip it out and show the IRS agent and you’re done, end of story.

People who claim 20,000 miles and don’t keep mileage logs have a tougher sell. You’ll need outside proof, like your oil change statements to show your overall mileage, plus some type of record to show where you’ve been. Like hotel receipts to prove you drove to various places on business. I charge $100 an hour to recreate those statements for you and it takes time to recreate 20,000 miles. You’ll save yourself a boatload of money and a big headache if you just keep the log.

Don’t make up mileage numbers. I’m serious about the 20,000 being an audit red flag. One audit I worked on the gentleman asked me why I thought he got pulled for an audit. It was obviously his miles. Everything about his tax return had looked pretty normal, except for his 20,000 business miles. Hint: round numbers in multiple thousands look suspicious. He had no mileage log so I had him get me his odometer readings from his oil change company. Well it turns out, not only did he not have 20,000 miles of business driving, he drove less than 5,000 miles during any given year for the past three years!

I’m good at what I do, but this guy wound up paying the IRS some money. I asked him, why did he claim so much in mileage when he only drove 5,000 miles altogether. He said that was what the other guys in his office claimed. Don’t do that! Use your own numbers.

The other thing that gets a lot of IRS attention is the meals and entertainment expense. This trick is so easy it’s ridiculous. Let’s say you take John Smith to lunch to talk about him buying your product. The waitress brings you the check and you get out your credit card. She brings the receipt back for you to sign and add the tip. You also write on the top copy: John Smith sales widgets. Or you may write Jane Doe, advertising; or Fred Bird IT consulting; or whatever. The bottom line is that this note tells you who you were with and what the meeting was about. The receipt itself gives the date, time and place. The waitress may wonder why you wrote about Jon Doe and the widgets on the receipt, but that’s fine, (she’s seen it before.) But by writing on the top copy of the sales receipt, you made the yellow copy a time recording stamp. As the yellow copy of your sales receipt ages it changes color. This shows that you wrote your note a long time ago – remember that an audit will be two or three years after the fact. This proves to the IRS that you were – time for the big word here—contemporaneously recording your business expenses. It gives you street cred with the IRS agent. You took care of business, back when you were supposed to instead of trying to make up stuff after it’s too late.

Bottom line, if you want to audit proof your employee business expenses, you want a copy of your company’s expense reimbursement plan, a solid mileage log, and notations made on the top copy of your meal receipts.

2 thoughts on “Audit Proofing Your Employee Business Expenses

  1. Hi Rene,
    Generally, when you drive to your first assignment–that is considered a commuting expense, not mileage for business. The mileage that you drive between two jobs in one day is considered business miles.
    Now are you getting a W2 or are you self employed? You see, if you were self employed, then you’d have a home office and then your business mileage would start at home.
    Some people receive W2s and also have home offices, but that’s a bit harder to prove, and the mileage claim isn’t as effective. But–if that’s the only card you’ve got left to play–I’d play it. Good luck.

  2. Hello, I have a question. I am being audited for mileage for ’09/’10, have kept good logs, but am not sure if my miles are deductible. I work in construction and drive directly from my home to various jobsites. I do not carry tools or equipment, but my job sites have been approximately 80 miles each way, hence a very large number of miles claimed. My accountant could not give me a straight answer. Can you advse? Thank you.

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