What would you do?

[Questionguy101]

A new client who started a delivery service in 2011.

His major business expense is, obviously, the auto expenses.

But, like 95% of the new business owners, he did not keep the mileage record (based on the reason that he did not know).

He has the credit card statements for the gas, the receipts for the car maintenance, etc.

He told you it is impossible to reconstruct the record because his route is different everyday.

I have explained in detail to him the mileage log requirements. I have made it clear to him that the auto expenses can be rejected if he fails to show the mileage record in case of an audit. Knowing the potential consequence, he says he will start keeping the record now.

As for the 2011 tax return, what would you do?

[Super Mom]

If it were me I'd use actual expenses. It's my understanding that he only needs that log for the mileage deductions. I could be wrong though....better check greater minds!

[KBTS]

If you choose actual expense in the first year, you cannot change to standard mileage in future years. Explain this to him and perhaps this will jog his memory to reconstruct a mileage log.

[JohnH]

Surely he has copies of customer invoices, signed delivery receipts, work orders, or some basis for determining how he was paid. This would be a valuable basis for reconstructing a mileage log.. But if he just doesn't want to spend the time doing that, he's going to owe a lot more tax. It's really his choice

[Jesse]

I agree with JohnH - he needs to reconstruct the log or forego the deductions, if you show him the consequences he may find it worth the time and effort.

If it were me I'd use actual expenses. It's my understanding that he only needs that log for the mileage deductions. I could be wrong though....better check greater minds!

I've always thought and lecture my clients they must keep a log whether they use the actual or the standard, but with the standard you do not need to keep receipts for actual expenses.

[dan doshan]

I would allow him mileage if he legitimately has such and wants to take, but do as you did and remind him he should have or be able to reconstruct his mileage expenses.

[taxea]

no ticky no laundry...unless he creates an accurate log from information he has available.

[erchess]

Furthermore

you'd better be able to document that you told him that in the event he's audited a reconstructed log likely will not fly. It will protect the preparer from all penalties and him from being charged with fraud but he'll end up paying back the tax savings with penalty and interest in all probability. That said, I would let him deduct miles based on a reconstructed log.

[joanmcq]

I've had reconstructed logs accepted in audit.

But you do need to keep a log even if you take actual expenses; otherwise how do you determine what the actual percentage of expenses to take?

I'd take the miles with a reconstructed log, and hand him one of the mileage logs I keep in my desk drawer for all new biz clients. Sometimes I have to beat them over the head with it.

[JohnH]

I'd rather go into an audit with a reconstructed log than to go without a log at all. But in this case, delivery services have records. Those documents alone constitute a contemporaneous record. SO in a sense his log isn't reconstructed at all - it's simply a compilation of a contemporaneous record. (Think that would fly with an auditor?) I think erchess is absolutely right in warning the client that he's on thin ice if an audit occurs, though.

Somebody generates a record telling where to pick up and where to deliver. He doesn't simply accept payments without some sort of accounting of what the payments were for. Either he sends the customer an invoice, or if he's working for a delivery service they send him some sort of recap of what he's being paid to do and where & when he did it each week, month, etc. Incidentally, his auto insurance company probably requires him to report to them an estimate of how many miles he drives each year. Hopefully that information agrees with whatever his log states.

Now if none of the above records exist and he just wants to wing it, then I'd have a big problem even preparing the return. The problem would balloon to an absolute "NO" if he just happens to qualify for EIC.

[NotEasy]

you'd better be able to document that you told him that in the event he's audited a reconstructed log likely will not fly. It will protect the preparer from all penalties and him from being charged with fraud but he'll end up paying back the tax savings with penalty and interest in all probability. That said, I would let him deduct miles based on a reconstructed log.

The OP said it is a delivery business. So the need for car expenses is unquestionable. Would they go that far to consider it a fraud if the taxpayer claim car expenses with a mileage log?

[Super Mom]

Just a thought....I would think the IRS would expect to see a fairly substantial car expense in this case, I know in cases of EIC they expect you to take the miles you are entitled to

[Gary2]

Would anyone consider reporting the miles on Sch. C, but answering the written substantiation questions "No"?

[S T]

Would anyone consider reporting the miles on Sch. C, but answering the written substantiation questions "No"?

I have over the last year or two with all of the new preparer penalties and due diligence, when client's records are not adequate.


I believe there is a prior thread on this issue - that Bees might have posted on.

S

[Gretel]

I have done that as well, checking the "No" box for written records if otherwise I had no doubt about reasonable miles.

I wonder why there are even two questions, if a written log is an absolute must, why do they not just ask: "Do you have a written log book to substantiate your auto expenses?"