IRS audits are about as much fun as root canals. Both are painful, costly and grueling. Unlike dental work, however, you may find your company (or your employees) audited again and again. Only companies that take the proper steps with their vehicle programs and have the correct processes in place have no reason for concern. But what are those proper steps and correct processes? Let’s dig into the ways a company can avoid a mileage-specific IRS Audit.
Employers generally provide for their mobile workers’ business travel in two ways. By reimbursing them for using their personal cars or by offering company-provided vehicles. Reimbursing personal vehicle use can come in the form of a car allowance or a mileage reimbursement. All vehicle programs are essential business tools for company operation, but only if they are administered fairly and accurately.
With a mileage reimbursement, car allowance or fleet program, that can prove difficult. In recent years, the IRS has been auditing mileage more often, and as anyone who’s been audited can attest, there’s few more distracting or disruptive exercises your organization can be put through.
Your employees must record, document and report every reimbursed business trip taken in their personally-owned vehicles. The IRS requires this documentation in the event of an audit. This is not as simple as asking your employees the total number of miles they drove or collecting receipts. The IRS requires a wide range of information when reporting mileage expenses:
Some companies still trust their employees to track business mileage manually. Unfortunately, this often results in mileage fraud or incomplete mileage logs. Without complete mileage logs, your employees can’t substantiate their business travel and reimbursements. Without substantiation, they could fail their audit. The employee would be responsible for paying penalties and back taxes. This raises an important concern. A failed audit could cause the IRS to take a deeper look into your other mobile employees and your company as a whole.
With a traditional car allowance, employees receive a flat stipend. The remains the same each month. However, because the stipend is not substantiated by mileage, the IRS considers it additional income. That means employers are taxed paying it and employees are taxed receiving it.
Companies with car allowance programs can avoid excessive tax waste by implementing an accountable program. With an accountable allowance, driving employees capture their business mileage and submit it in compliant mileage logs. The stipend they receive will be untaxed up to the IRS mileage rate. The IRS will tax any amount over that as additional income. For this to work as intended, mileage logs must be both compliant and accurate. Again, this is can prove to be challenging with manual mileage logs.
Company-provided vehicle programs are the most expensive vehicle program option. Still, many employers find that fleet vehicles can be a great tool for their mobile workers. Of course, this depends on whether the company administers their fleet program correctly. Without accurate records of the business and personal mileage put on fleet vehicles, a company could find itself on the wrong side of an audit.
That might cause you to pause and ask: wait, if it’s a company-owned vehicle, I don’t have to track my business mileage, right? Wrong. Most companies that offer fleet vehicles to their driving employees allow them to drive the vehicle for personal reasons. The IRS views this as a taxable benefit. Companies may implement a personal-use chargeback. However, if employees do not substantiate this with mileage logs, it exposes the mobile worker to audit. If an employee does not track their business versus personal mileage, they may find themselves subjected to an audit.
Tracking business and personal mileage sounds simple. However, it becomes very complex when accounting for commute mileage. Many employees consider the miles driven from their home to their place of employment business mileage. The IRS does not. It considers these “commuting miles.” Employees must treat these as non-deductible, personal mileage. This may seem obvious for traditional office-based employees. However, the distinction can be lost on workers who use fleet vehicles outside of traditional work hours or those who perform most of their work on the road.
Those employees who don’t regularly report to a traditional corporate office should know how the IRS views mileage. Generally, they consider the miles driven from their home to their first work location and from their last work location back home commute miles. Many mobile workers (and employers) are unaware of this distinction and mistakenly report these trips as business miles. This results in inaccurate fleet personal use reporting and increased risk in the event of an audit (and often additional fees). Additionally, there are lost costs of having under-applied any personal use chargebacks.
In the face of audit risks and tax waste, what’s an employer to do? Tracking and reporting accurate personal and business mileage used to create significant administrative burdens for employers and employees. Luckily, this is no longer the case. Companies now, more than ever, are leveraging GPS-enabled smart devices, cutting-edge software, and comprehensive vehicle management solutions to capture all of their employees’ business mileage expenses.
Mobile workers driving personal vehicles or company-provided vehicles can use the same technology that’s empowering the new digital workplace to collect, store and report business travel information to the IRS. This is all without the mountains of paperwork manual pen-and-paper mileage logs create. Employers can leverage to automate employee mileage tracking and accurately differentiate their employees’ exact business, commute and personal miles. Again, that’s regardless of whether they’re being reimbursed or driving a company vehicle.
With the right mobile applications and software platform, employers can eliminate manual tasks in the field (ultimately increasing productivity), reduce costs and ensure IRS compliance. What’s more, they can gain insight into driving behaviors and mobile workforce efficiency.
Inaccurate vehicle programs cost employers thousands of dollars per employee every year and increase the risk of costly audits. Companies that rely on inaccurate programs can’t verify workers’ actual travel costs and remain exposed to IRS audit risk.
Fortunately, there’s a simple solution to this issue.
Advances in technology have made manual, time-consuming reporting methods a thing of the past. Whether you use FAVR programs, corporate fleets or a combination of the two, tracking actual driving behavior and ensuring that you’re paying for the true costs of employees’ business travel has never been easier. Your company deserves the peace-of-mind that your vehicle program won’t contribute to the pain of an IRS audit. Why wait? Get in touch with us today.