Do you claim deductions for your vehicle? If you do, make sure to keep a detailed log of your of all your businesses trips. There are many taxpayers who have tried and failed to take advantage of these deductions, including the recent example of Katrina Taylor. Ken Berry, from Accountingweb.com, reviews the case and discusses what we can learn from this misguided taxpayer’s mistakes.
Katrina Taylor et vir v. Commissioner, TC Memo 2017-99, the taxpayer committed a multitude of sins – including errors, omissions, and inflated expenses – that brought upon her downfall.
Katrina Taylor’s husband operated a recycling business in West Virginia. At the same time, she operated a long-term care billing business.
Taylor claimed that she sought out healthcare providers, mainly nursing homes and hospitals, and offered to review their customer accounts. Then she allegedly proposed to prospective clients that if she collected on any past-due accounts, they would pay her a percentage of the amount collected. Taylor also worked full-time at a hospital.
During the tax years in question, Taylor included her business income and expenses, consisting mostly of alleged car and truck expenses, on the Schedules C for her husband’s recycling business. Those Schedules C did not indicate which income and expenses were attributable to which business.
Subsequently, the IRS disallowed the couple’s deduction for car and truck expenses. So the taxpayer took her case to the Tax Court.
At trial, the couple produced spreadsheets showing that Taylor made 144 distinct trips between their home and prospective client sites. Each entry had a date, a destination, beginning and ending odometer readings, total miles driven, and a description of the work allegedly performed. In each instance, the description of that work was identical: “Distribute Informational Brochures/Market.”
But the Tax Court didn’t find this evidence, or the taxpayer’s testimony, to be credible. First, it was clear that the spreadsheets were not prepared contemporaneously with the alleged travel. Taylor testified that she had recently created the spreadsheets using notes of beginning and ending odometer readings that she had kept. But she did not produce at trial either the notes or any other contemporaneous record of her travel.
Second, none of the spreadsheet entries showed the time Taylor actually spent at any destination or the specific activity she performed there. All that appears is the vague and generic phrase “Distribute Informational Brochures/Market,” which was repeated for every one of the 144 trips.
This description does not constitute sufficient evidence corroborating statements as to the amount, time and place, and business purpose for each expenditure, as required by the recordkeeping rules.
Third, the court found numerous internal inconsistencies in the spreadsheets that make them unreliable, such as:
- Ending odometer reading for a trip was higher than the beginning odometer reading for the next succeeding trip.
- Number of miles driven seemed obviously inflated.
- Significantly different mileage for round trips to the same destination.
- Vastly different mileage for trips to destinations within the same state.
- Multiple trips, a few days apart, to destinations in the same state.
The Tax Court wasn’t buying it.
To add insult to the taxpayer’s injury, the Tax Court tacked on accuracy-related and substantial underpayment penalties.
Lesson to be learned: The IRS is a stickler for observing the rules in this area, and the courts will usually back it up. Don’t allow your clients to take any shortcuts.
Ken Berry is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.
