Audit-how do you see it?

[Unregistered]

I went to an audit today and heard something from the auditor that made me say hum.

The auditor said per her superiors that cell phone expenses can not be claimed unless the client has the bill/invoice and that every call must show business purpose and name of person spoke to . She said they would need to on the actual bill or spreadsheet list the phone number, name and purpose of call or otherwise the expense will be disallowed. This is for sch c , 1120, 1120s ,1065 and 2106.

I know having the bill is important but the name and purpose for every call seems a bit crazy to me.

Luckly it didn't cause a problem for my client because it was a little expense 1000.00

Have any of you heard the same in an audit or at any seminars?

[Jan]

cell phone

from
J.K. Lasser's
You need detailed records to support your claimed business use if you are deducting the cost of the cell phone or service charges. Keep records showing the amount,time,place and business purpose of your calls to satisfy the stringent substantiation requirments for
"listed property".

[Gretel]

It still is crazy. If people don't even keep mileage records how in the world are they keeping track of this information. I can see the need to have the phone bill and highlight business use numbers. But creating a spreadsheet?

[Jiggers]

Cell Phone use!

It still is crazy. If people don't even keep mileage records how in the world are they keeping track of this information. I can see the need to have the phone bill and highlight business use numbers. But creating a spreadsheet?

The IRS is just trying to limit this deduction, or eliminate it completely.

I can't see the IRS disallowing the deduction for 1120 or 1120S.

I can't see the IRS disallowing the deduction for C or 1065 if less than 100% of the expense is deducted.

Does the taxpayer have another personal cell phone? My wife does. I don't deduct that one. Just mine.

Does the taxpayer have a land-line phone in his business?

Does he have to be in contact with his business while out of the office?

I use mine primarily for long distance calls as there is no additional charge for that. It saves me money! I would love to argue this item in an audit. I would ask the auditor if I should get rid of the cell phone, which is inexpensive, and start using my land-line for long distance calls, because the expense then would be more than the cell phone. Meaning less taxes.

Does your taxpayer have other phones included in his bill: wives, kids, parents, etc.? That might cause a problem.

[Unregistered]

A cell phone is listed property. Under §274(d), to take a deduction for listed property, the strict substantiation rules must be followed. The Tax Court has consistently ruled for the IRS in this area. One other problem you may encounter is the notion that allocation of cell phone use may not always be allowed. In one recent TC case, the judge ruled the cell phone was used for personal use, so only any excess costs above & beyond the flat monthly charge could possibly be deducted.

New York Enrolled Agent

[OldJack]

This is one of those cases where the requirement to prove the deduction is greater than the benefit of the deduction. In most of those cases my attitude is take 100% of the deduction knowing that if audited you will lose the argument but over the years you will get more deduction than you lose. Like the speed limit someone mention earlier... everyone goes over a little most of the time and doesn't get a ticket as long as they keep it reasonable.

Sometimes you have to let the auditor have something to write-up and this can be given without argument if negotiating something else that really matters.

[Black Bart]

It's way harsh okay, but

like Jiggers said, they're trying to limit or eliminate the deduction and, using these drastic tactics, they'll probably do it too. I have yet to meet the taxpayer who had such records. Many have their phone invoices, but that's about it. Besides, who do you know that doesn't use their cell phone much of the time for personal calls?

No doubt some meticulous sorts will do it, but if you're expecting the average t/p to have both the time and the inclination to record the details of every phone call he/she makes all year long; you're betting on a long shot indeed.

I agree with Jack (although not as bold as he -- I take 95%) about writing it off and using the law of averages to prevail.

P.S. No, I haven't seen it in an audit yet. But I'm expecting it (and for them to disallow almost 100%) whenever the next one comes up and the client's claiming cell phone use.

[Bees Knees]

A cell phone is listed property. Under §274(d), to take a deduction for listed property, the strict substantiation rules must be followed.

Funny you should mention Section 274(d).

Regulation Section 1.274-5A(c)(3) says:

(3) SUBSTANTIATION BY OTHER SUFFICIENT EVIDENCE. If a taxpayer fails
to establish to the satisfaction of the district director that he has
substantially complied with the "adequate records" requirements of
subparagraph (2) of this paragraph with respect to an element of an
expenditure, then, except as otherwise provided in this paragraph,
the taxpayer must establish such element:

(i) By his own statement, whether written or oral, containing
specific information in detail as to such element; and

(ii) By other corroborative evidence sufficient to establish
such element.

If such element is the description of a gift, or the cost, time,
place, or date of an expenditure, the corroborative evidence shall be
direct evidence, such as a statement in writing or the oral testimony
of persons entertained or other witness setting forth detailed
information about such element, or the documentary evidence described
in subparagraph (2) of this paragraph. If such element is either the
business relationship to the taxpayer of persons entertained or the
business purpose of an expenditure, the corroborative evidence may be
circumstantial evidence.

[Unregistered]

Bees

I'm not really sure where you are headed with your post. There is NO doubt that evidence can be oral or circumstantial. But, regardless of its nature, there must be EVIDENCE - evidence is the means by which the truth or falsity of a matter is established.

Perhaps, I infer incorrectly from your post, that you think that the circumstantial evidence sets a "low bar" of evidence that the taxpayer is required to achieve. That is simply not true. The Courts (and the IRS) will require "sufficient evidence" of corroboration. I think we would agree that the taxpayer's own oral testimony will not, in and of itself, be sufficient as corroboration of the expense of a cell phone as a tax deduction.

New York Enrolled Agent

[OldJack]

De Minimis Fringe Benefit

I believe my first argument with the auditor would be my claim that the employee was required to be available with a cell phone and personal use was a de minimis fringe benefit. If needed I would take it over the auditor's head for decision, but ultimately I would expect high probability to lose.

[Bees Knees]

Perhaps, I infer incorrectly from your post, that you think that the circumstantial evidence sets a "low bar" of evidence that the taxpayer is required to achieve. That is simply not true. The Courts (and the IRS) will require "sufficient evidence" of corroboration. I think we would agree that the taxpayer's own oral testimony will not, in and of itself, be sufficient as corroboration of the expense of a cell phone as a tax deduction.

Yes it could, if the oral testimony was credible.

My comment is in regards to the discussion that people think there needs to be some extensive log book with names, places, and details about the discussions for every call ever made on a cell phone for it to pass an audit. It may be that that is the impression an auditor will require from a taxpayer, and the tax preparer trying to defend the deductions.

The regulations clearly state that oral testimony may be acceptable as “direct evidence” that will substantiate a deduction.

Let me give you an example of how that works. During an audit, the auditor admitted to me that my client was credible and honest in his interview. At the same time, the auditor was explaining to me that since there was no written evidence, such as receipt for a number of charitable contributions, he was going to only allow half of the deductions claimed. I had my client sign a statement to the effect that the numbers reported on the original return were correct and true. I noted in my correspondence to the auditor that since he had previously admitted to me that my client was honest, then this signed statement saying his previous oral testimony on the amount of deductions should be sufficient evidence to support the claimed deductions.

The audit came back as a no change audit. I painted the auditor into a corner on that one. It illustrates that oral testimony in itself can and should be able to substantiate a deduction, provided the oral statements of your client are credible, believable, and reasonable.

[Unregistered]

Bees
Congratulations on your victory for your client but your example appears to be a non sequitur.

We were discussing the STRICT requirements of §274(d) but you used an example of a §170 deduction. In the §274 regulation you posted, it seems the taxpayer has an "and" requirement in (i) and (ii). Perhaps, I missread, but the regulation seems to say that direct evidence in the form of oral testimony must come from others.

I don't disagree that oral testimony can be useful in many situations but consider the language of Judge Parr in TC Memo 1996-533 - "§274(d) specifically bars a taxpayer from claiming a deduction on the basis of any approximation or the unsupported testimony of the taxpayer".

New York Enrolled Agent

[Unregistered]

Well thanks for all your posts. I just thought it was interesting.

What if the cell phone was free with the cell phone contract? Still listed property?

Do you still depreciate a cell phone if it cost 50$.

[veritas]

Seven years.