It’s every taxpayer's worst nightmare to receive a formal notice from the Department of Treasury. An IRS audit means there is likely some information on your tax form that doesn’t add up correctly or isn’t in accordance with federal tax laws. In some cases, a review request is simply the result of misreporting or common tax mistakes. Other times, the information you provide could signal a red flag to the IRS, especially if you do not have accurate records to back up your deduction.
To give you an idea of what leads to an IRS audit, we’ll answer the following questions below and hopefully dissuade any taxpayers from falsifying or postulating information on their next tax return.
Failure to maintain accurate records or providing false claims will increase your chances of an IRS audit. Even if you did complete drives for business-related purposes, the IRS can’t legitimize your deduction unless there are sufficient records to back up your claims. That is exactly why “estimating” your business miles is never a good idea. Regardless of the year or your annual income, you should always keep track of mileage to avoid discrepancies on your tax return.
When you receive notice of an IRS audit, the first thing they will ask for is supporting documentation. This is so the IRS can verify the information on your tax return and determine if you wrongfully claimed mileage or any other deductions. In the event that you lied about the number of miles driven for work-related purposes, you could be facing civil penalties and fines depending on the gravity of your situation.
At any rate, it is important for qualifying taxpayers who claim vehicle expenses to be honest. If you plan to do taxes yourself, make sure to maintain records throughout the year and hold on to any documentation for at least three years after that. Three years is the length of time that the IRS can request an audit following your tax submission.
If you’re concerned about getting audited, it’s also good to know the restrictions surrounding the mileage deduction. The only people who qualify for claiming mileage on taxes include business owners or sole proprietors, self-employed individuals, and independent contractors. Luckily, there is no limit on the amount of mileage you can claim on taxes, granted that all mileage is related to business purposes.
The IRS does not specify how taxpayers should track mileage, although there is one method that works better than the rest. Instead of manually logging your odometer reading each trip, we recommend downloading an automatic mileage tracking app to your smartphone. Using a combination of Wi-Fi, GPS, and mobile data, you’ll never have to press start or stop to track a drive.
MileIQ, the #1 trusted mileage tracking app, offers advanced software that runs in the background of your phone to log every business trip from beginning to end. Those business miles get safely stored on our cloud-based system and become readily available for when tax season arrives. Even tax professionals rave about the MileIQ app because it creates monthly reports and easy-to-access information regarding your business mileage.
When the IRS decides to further examine a taxpayer’s return, it’s standard to receive a written notice in the mail. Typically, the letter is sent to the person or business’s last known address on record. If the concerns regarding your tax return are a matter of discrepancy, they may send a CP2000 notice initially, which is not treated as a formal audit. The CP2000 is simply a request to make changes to your submitted tax form.
On the other hand, an official audit is triggered by a number of factors. Most times it originates from inaccurate reporting or an anomaly found on your Schedule C Form. Because self-employed individuals are responsible for reporting business expenses, such as vehicle costs, insurance premiums, interest, and more, it’s crucial to ensure that all the information you provide is correct and error-free.