Keeping "Audit-proof" Car/Truck Expense Records

You are trying to do your taxes and you remember that you drove to Chicago back in July to attend a trade show. Can you take a tax deduction for the trip expenses? Well, yes and no. If you have the records for the hotel and receipts for the meals, you can probably deduct those, but you can't go back and add incidentals or the mileage you drove. Why not? Because the IRS (substantiated by the Tax Court), says the records for the incidentals were not contemporaneous (made at the same time as the trip). A recent Tax Court case points up this requirement.

Three Requirements for Business Records
If you want the IRS to accept your business records, including deductions for car/truck expenses, they must be

• Complete, including all information about the expense: date, amount, vendor, and what it was for
  
• Accurate, meaning you can't give a false amount or just estimate.
  
• Timely, meaning that the information is collected and recorded at the time the expense was incurred.

The Case of the Soccer Coach
The soccer coach in this recent Tax Court case (Fuentes v. IRS) claimed un-reimbursed expenses for traveling to soccer games, for lodging, meals, and car expenses on his personal tax return. The Tax Court first noted that the burden of proof is on the taxpayer. This is one of those exceptions to the saying that the burden of proof is on the plaintiff. The Court then said the coach did not substantiate his expenses so they did not allow the deduction.

What the Tax Court Said
In its Opinion, the Tax Court said that, in order to substantiate a business expense, the taxpayer must produce "adequate records" for that expense must include

1. The amount of the expenditure
   
2. The amount of business use of the vehicle as a percentage of the total use,
   
3. Time (the date of the expenditure or use), and
   
4. The business purpose of the expenditure or use.

What are Adequate Records?
The Tax Court Opinion continued by stating that "adequate records" or sufficient evidence to corroborate statements is

A record of the mileage made at or near the time of the automobile’s use that is supported by documentary evidence has a high degree of credibility not present with a subsequently To meet the adequate records requirement, the taxpayer must maintain an account book, diary, log, statement of expense, trip sheets, or similar record and documentary evidence that in combination are sufficient to establish each element of expenditure or use. An adequate record must be prepared or maintained in such manner that each recording of an element of an expenditure or use is made at or near the time of the expenditure or use. [M]ade at or near the time of the expenditure or use’ means [that] the elements of an expenditure or use are recorded at a time when, in relation to the use or making of an expenditure, the taxpayer has full present knowledge of each element of the expenditure or use.

I wanted to quote the entirety of this statement in the Opinion, which is supported by references to IRS regulations, so you can see the specific requirements of the IRS. The emphases are mine. The soccer coach presented the IRS with a lovely spreadsheet showing all his trips, mileage, even breaking down business mileage, commuting mileage, and other mileage. But the IRS, and subsequently the Tax Court, said the records were not captured every day, so they did satisfy the adequate record requirement.

The IRS on Timely Records:
The IRS says in Publication 463 you should "record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence. A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. You do not need to write down the elements of every expense on the day of the expense. If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record."

There is a saying in the law that something not written down doesn't exist. In this case, if it is not written down AT THE TIME IT HAPPENS, it doesn't exist, for tax purposes. If you don't have a travel record or notebook in your car to write down business travel expenses, even if you can reconstruct them after the fact, they won't be satisfactory for the IRS.

I'm not saying that keeping good records will get your expenses approved by the IRS. Check with your tax adviser for more details relating to your business situation.