Deductible Mileage

[erchess]

I have a client who is being audited. We have been asked to bring to NC his Federal and State Returns and all underlying records for the year in question. He itemizes his deductions but he doesn't usually have enough Misc Deductions Subject to get over the 2% hump. He does have a business and it provides nearly all the items on the return that unlike say W-2s and his Mortgage Interest don't get reported to the IRS by someone else. So I basically have one question. Is there any place he can deduct his mileage to the audit either as a Sch C or as a personal expense? If he did have enough Misc Deductions could he put the mileage there? He can't put the mileage as Misc NOT Subject can he? Thank you for all responses.

It happens that in this case the mileage amount is trivial but I was just wondering about it because some day I might have a client to whom it matters.

[S T]

Can you clarify

He itemizes his deductions but he doesn't usually have enough Misc Deductions Subject to get over the 2% hump. He does have a business and it provides nearly all the items on the return that unlike say W-2s and his Mortgage Interest don't get reported to the IRS by someone else.

Guess I am confused by your post. On one hand you say not enough Misc Deductions which would be probably form 2106 as employee business expenses, and then you say "he does have a business" which might be a Schedule C, or unreimbursed partner expenses, etc.

If an employee, wouldn't you complete form 2106 which would flow through to Sched A, misc deductions subject to 2%

If a sole proprietor, the information would be on Schedule C

If a partner or S Corp, the information would be on Schedule E page 2 as unreimbursed expenses

Is your taxpayer an employee, or a self employed, etc?

Or, are you just looking for ways to "bump" up the Schedule A so you can take advantage of the other deductions on Schedule A?



S

[erchess]

Will Try To Clarify

1. The man is an employee.

2. His wife is an employee

3. The man has a Sch C Business. Profit from the Business constituted over half of the family income for the year in question.

4. There are no other entities in play.

5. If I were to put the audit mileage on Sch A I would calculate it multiply it by I am not sure what rate and add it to my fee for handling the audit and whatever he paid whoever prepared his 08 return. I hadn't thought about the 2106 angle.

6. I guess this would be one way to put the question "A client who has a Sch C Business but who along with his spouse had employee compensation for the year in question has been asked to bring to NC his Federal and NC Returns and all supporting records. He will drive to the audit. Can he deduct the mileage to the audit and if so where? He probably can't as a practical matter get over the 2% of AGI hump so treating it as personal on Sch A is unlikely to help."

[S T]

Sorry Erchess

I am sorry Erchess, your first post really confused me in talking about business miles.

You are asking, where can the taxpayer deduct business miles from his location to the NCDOR audit?

If the NCDOR audit was totally business related in scope, I would say taxpayer could then deduct business miles on his Schedule C.

If the NCDOR audit was personal related in scope, not sure if there is a deduction, but if there was, I would agree that probably Schedule A subject to 2%. There is no mileage rate given for personal use other than medical and charitable, so I would not know how you would arrive at an amount.

If the NCDOR audit was a combination related in scope, then pro-rate part to Schedule C, and part to personal.

I just have never thought about it much, and what type of deduction for mileage are you anticpating, I wouldn't think the dollar amount would be much, or benefit the taxpayer one way or the other. Current mileage rate for business is 55c ents for 2009 so if 100 miles and all business related $55. I would not know what rate to use for personal mileage rate as one is not given except for Medical or Charitable. $55 deduction presuming 50% for business would be $27.50 and at a 25% tax rate and 15.3 SE rate, would provide the client with a maybe what $ 11 tax savings on Federal and a few dollars on NCDOR.

Not hardly enough to worry about, and if you are billing, and the client is driving to NCDOR, you can adjust your billing to reflect the difference.

I usually have the client supply me with the information, and then I bill the taxpayer in my overall fee for the audit, but again you could be talking a split amount relating to personal and business. Depends on the scope of the audit.

Sandy

[Gene V]

The court say mileage is deductible

Mileage part from court case.

[Dieter Stussy v. Comm'r; T.C. Memo. 2003-232; No. 4088-02 (4 Aug 2003)].

Mileage Deduction

Dieter Stussy argued that he may deduct as a miscellaneous itemized deduction an amount for the 275.1 miles that he drove during the year in connection with the determination of his personal income tax liabilities. The IRS contended that all of this mileage is personal and, hence, nondeductible.

In addition, the IRS argues that the mileage was not incurred either in connection with the determination, collection, or refund of a tax, or as a related ordinary and necessary expense.

The court ruled that Stussy may deduct all of the disputed mileage at the standard mileage rate. Section 212(3) allows an individual to deduct "all the ordinary and necessary expenses paid or incurred during the taxable year ... in connection with the determination, collection, or refund of any tax." The Treasury Department has interpreted this section as follows:

"Expenses paid or incurred by an individual in connection with the determination, collection, or refund of any tax, whether the taxing authority be Federal, State, or municipal, and whether the tax be income, estate, gift, property, or any other tax, are deductible. Thus, expenses paid or incurred by a taxpayer for tax counsel or expenses paid or incurred in connection with the preparation of his tax returns or in connection with any proceedings involved in determining the extent of tax liability or in contesting his tax liability are deductible. J [section] 1.2121(1), Income Tax Regs.]"

According to the court, all of the disputed mileage was an ordinary and necessary expense paid by Stussy during 1998 in connection with the determination of his federal and state income taxes. Therefore, the mileage is properly deductible as a miscellaneous itemized deduction under Section 212(3).

The court agreed with the IRS that Section 262 generally precludes any deduction for personal expenses, and that the claimed mileage is all attributable to Stussy's personal income taxes. However, the court also said that the exception in Section 212(3) for expenses of contesting tax liabilities was prescribed specifically by Congress to allow taxpayers to deduct a personal expense that would otherwise be nondeductible.

Note: Although the 165.5 miles which Stussy claims to have driven for the copying and filing of his personal income tax returns seems high considering that he lived in Los Angeles, the IRS did not claim that the mileage was excessive.

[FEDUKE404]

Sch C must be the issue

It sounds like NCDOR is sniffing around the Schedule C, especially for "constituted over half the family income."

The expenses of getting to/from Raleigh may be the least of his worries. The NCDOR has gotten quite aggressive in recent years, and their "selection" process is refined. Points of emphasis have included excessive non-cash contributions, so-called independent contractors, and Sch C loss situations.

As others have noted, if you wish to push it I think a reasonable approach would be to take some portion of the audit travel expenses on Schedule C. Depending on what constitutes the Schedule C business, some may think it better to "let sleeping dogs lie" for taking any travel expenses.

FE

[erchess]

De Minimis

I was actually just kicking this around as an idea for future reference. The taxpayer lives perhaps half an hour on the freeway from the office where the audit will be conducted.

[JohnH]

FE: I'm trying to figure out how NC has refined its selection process, since they don't get a copy of Schedule A & Schedule C with the return, or 1099/1096 copies from issuers. Do they make these audit decisions based on matching info they receive from IRS?

[FEDUKE404]

Finding returns to review

FE: I'm trying to figure out how NC has refined its selection process, since they don't get a copy of Schedule A & Schedule C with the return, or 1099/1096 copies from issuers. Do they make these audit decisions based on matching info they receive from IRS?

To quote a famous person: Someone "higher up the food chain" will have to answer that query. I've wondered the same thing.

A friend who is in management with a local store-front operation was the one who clued me in on the increasing audits for contributions, especially of the non-monetary type. (Prior state points of emphasis have been business travel and "consultants" who proliferate in the local area.) One possible avenue on contributions is the special credit that NC gives taxpayers, who do NOT itemize, on certain levels of contributions. But even there the NC tax return only reflects the total contributions.

My poorly educated guess is that NCDOR has access to more than the "state" information when a tax return is filed. They might even have access to the score awarded by the IRS and decide to pursue things further.

But OTOH, at times I find that many folks at the NCDOR are oblivious to everything but the absolute simplest tax rules. Perhaps just the blind squirrel eventually finding a nut syndrome at play??

FE

[Burke]

FE: I'm trying to figure out how NC has refined its selection process, since they don't get a copy of Schedule A & Schedule C with the return, or 1099/1096 copies from issuers. Do they make these audit decisions based on matching info they receive from IRS?

I believe the IRS transmits various items of information to all states, including AGI, Sche A & C totals, etc. as well as filing address. I am basing this on various letters from the state questioning certain items related to these figures/information.

[Lion]

Sharing Information

The IRS has agreements with many states (know CT is one, but don't know about NC) to share information, especially re payroll audits and misclassified employees (independent contractors) meaning that they let the states conduct payroll audits and turn the information over to the feds, in many cases, instead of doing the audits first at the federal level. Many states have stricter labor laws than the feds and are hungry for additional revenue. If your client has a schedule C, I'd be worried about his classification himself and his contract labor. Of course, you also know that rules have tightened re noncash contributions. But, I'd ask NC what they want to see and why. Tell NC you want to help your client gather his records to meet their needs and what categories of items should you work on first, blah, blah, blah.

[erchess]

Contractors

This guy performs the service of shoeing horses for too many different people for me to question his status as self employed. But I am still trying to wrap my mind around the law as it applies to the people who each did under $600 of work for him without getting 1099s. He and the preparer of the return thought that he could write those expenses off on his C as Casual Labor.

[JohnH]

He can, provided they met the definition of independent contractors. The "under $600" rule only determines whether a 1099 should have been issued to them. It has nothing to do with determining whether they were independent contractors in the first place.

[erchess]

Yes I know

I know that these contractors work when they want to and don't when they don't. They know his schedule and he never knows when he is going off alone or with I believe up to three helpers. They are trained farriers themselves who did not learn the trade from him. (Apparently one can learn the trade by working for someone in the field or by going to any of a number of Community Colleges and at least one four year Baccalaureate program and most people apparently do some work with a qualified person then if they like it they go on for classroom training.) I need to ask how it is determined who will shoe which horses. I understand that when he has help he takes on the more difficult cases such as animals that may be lame or for some other reason uncooperative. Everyone uses at least some of my client's tools and perhaps some of his own. I would imagine that my client checks on these peoples' work because it is he and not they who is liable if the job is not done correctly. Opinions on treating them as contractors anyone?

[JohnH]

Just get out the SS-8 and go through it, applying the facts & circumstances against each of the questions asked. I don't actually send it in to IRS, but I do give it to the client and let them see how the IRS views the subject.

I also tell them that it isn't a matter of adding up how many answers go for or against them, but rather that the IRS gets to pick & choose which factors they wish to emphasize in each situation. Common sense will lead the client to the correct conclusion that the deck is stacked against them in all but the most concrete situations. They may still choose to treat the workers as I/C's, but at least they've been warned.

You've already mentioned a couple of items which would strongly argue in favor of their being employees, but there's still the matter of how much was paid in total and the relative risk associated with the payments.