Copious, Even Redundant, Recordkeeping Can Save You Thousands If You’re Audited

For anyone who has to pay out-of-pocket expenses in the performance of his/her job, one of the keys to minimizing one’s federal income tax obligations is ensuring that you maximize your deduction relating to this expense. Making the most of this deduction rests, in large part, on having adequate documentation to back up your claims. As one taxpayer found out recently, it is better to have redundant records than no records, even if some of those records are crudely maintained.

The case of Powers v. Commissioner regarded the travel expenses of Kristen Powers, a real estate sales agent working for Centex Homes during 2007 and the first nine months of 2008. The taxpayer maintained a “messy” handwritten mileage log, which she subsequently transcribed into an electronic spreadsheet that she kept on a computer and a flash drive. The taxpayer claimed $24,000 in vehicle expenses in 2007 and $24,700 in 2008.

The IRS subsequently selected Powers for an audit. Because the computer had become lost and the flash drive destroyed, the taxpayer prepared a weekly mileage summary, based upon her handwritten logs. The IRS determined that Powers was only entitled to $14,900 in vehicle expenses across the two years and assessed a deficiency. The US Tax Court significantly reduced Powers’ deficiency. The court explained that, to maintain a vehicle expense deduction, the taxpayer must produce records sufficient to prove, in tandem with her own statements, “the amount, date and time, and business purpose for each expenditure.” In Powers’ case, the mileage logs and weekly summaries were enough to establish that she routinely traveled from Centex’s office in Portland, Ore. to several Centex developments around Oregon, amounting to 115 miles per day, six days a week, every week until her separation from Centex.

This meant that the taxpayer was entitled to a deduction of approximately $17,400 in 2007 and $13,600 in 2008. The taxpayer might have earned a larger deduction in 2008, but again, the key was recordkeeping. The taxpayer kept no records of the mileage she drove as a solo real estate agent during the last three months of 2008, so the court disallowed any deduction for this mileage.

While the court did not allow the taxpayer’s entire deduction, $31,000 is still substantially higher than $14,900, meaning that, even after losing her electronic mileage documents, Powers undoubtedly saved several thousand dollars in tax deficiencies as a result of having her “messy” mileage log and the weekly mileage summaries. Had she kept up with her handwritten log or summaries after leaving Centex, her deficiency likely would have been even less.

Whether you are an at-will employee or an independent contractor maximizing your deductions is vital to minimizing your tax obligations, and proper, even redundant, documentation can go a long way to supporting those deductions. To learn more about getting the most from your deductions, and the proper means for documenting them, consult with the experienced tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C. They have years of experience helping people ensure that they are prepared to get the most from their deductions. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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