There are many reasons why the IRS may audit your organization, however, one area often overlooked is your vehicle program. Whether you administer a fleet or reimbursement program, the way in which you reimburse or charge back your employees for business mileage could be a red flag.
It’s important to understand why the IRS would decide to audit your company based on how you administer your vehicle program. In many instances, it’s not only the company that gets audited, but your mobile employees as well.
There are five tips you can follow in order to keep the IRS at bay:
Tip 1: Collect IRS-Compliant Business Mileage Logs
In order to ensure your mobile employees are recording the date, destination, business purpose and total mileage per trip for all business trips taken, it’s important to implement policies stating what’s required and educate employees on best practices regarding IRS-compliant mileage logs.
Tip 2: Maintain Your Records
Although audits typically occur every three years, the IRS can request files for up to six years. In order to be prepared for an audit, best practice is to keep safe mileage records for seven years.
Tip 3: Understand Commute versus Business Mileage
According to IRS Definition Publication 463, daily transportation expenses you incur from your home to first place of business (and vice versa) are generally considered “commute”, and are not able to be deducted or expensed as business mileage. Keeping that in mind, it is important for your organization to be cognizant of a few different types of scenarios that are exceptions to the rule:
Scenario 1: Your employee has a Regular Office – If an employee drives from home to a corporate office or main place of work (and vice versa), this is considered commute mileage. Or, there might be an instance in which an employee travels directly from home to a customer meeting, airport or work location that is not considered their primary or designated place of work, this is considered business mileage.
Scenario 2: Your employee has a Home Office – When an employee has a home office that qualifies as a principal place of business, any mileage that is driven between home and any work location is considered business mileage (For example – you work a 40-hour work week, and 20 or more of those hours are worked from home, any miles driven for work are considered business mileage).
Scenario 3: Your employee does not have a work or home office – An employee who drives between their home and temporary work site within their own city may consider this commute mileage. Alternatively, an employee who drives from their home to a temporary work site that is outside of their city may consider this business mileage.
Tip 4: Automate with Technology
How can all of this be avoided? Ensure employees understand these policies and attempt to automate processes for your employees. Manual mileage logs leave room for error given the need for an employee to remember exactly where they went, when they went, and the route they took to get there. This happens to be one of the main reasons an employee would be audited by the IRS. Leveraging a mileage tracking app allows your mobile employees to set it and forget it, all while creating IRS-compliant mileage logs.
Tip 5: Understand what the IRS considers to be a “perk”
The majority of expense reimbursement plans are considered Accountable Plans, where one or more of the following conditions are met: a business reason for the expense exists, receipts serve to substantiate the expense, and/or employees must return excess reimbursements within a reasonable time (usually within 60 days of travel). If the plan DOES NOT meet one or more of the above conditions, this is what is considered a Non-Accountable Plan, where amounts reimbursed are seen as income to the employee and should be included on his or her W-2 as taxable income. It is recommended that you abide by the following scenarios in order to eliminate the chance of penalties and back taxes in the event of an audit:
Personal use of company-provided vehicles – Your organization should require the tracking of personal use on your company-provided, fleet vehicles. This personal use must be included as taxable income on the employee’s W-2 or deducted through a chargeback.
Substantiated reimbursements exceeding the IRS Standard Mileage Rate –Your organization should ideally have receipts or records to prove actual costs and be on a Fixed and Variable Rate (FAVR) Reimbursement Program.
For additional details on how to prevent your organization from an IRS audit, Check out this Webinar to learn more!
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice. Motus does not provide tax, legal or accounting advice. For any such advice, you should consult your own advisors.