Business Mileage 101: How to be Prepared for an IRS Audit

IRS audits are about as much fun as root canals. Both are painful, costly, and grueling. Unlike arduous dental work, however, you may find your company (or your employees) audited again and again if you’re not careful to take the proper steps to have up-to-date vehicle programs and processes in place.

Employers generally provide for their mobile workers’ business travel by either reimbursing them for using their personal cars or providing them with company-owned or leased vehicles (known as fleet vehicles). Both methods are great business tools for the growing mobile workforce population, but only if administered in a way that is fair, accurate, and defensible. The IRS has been auditing mileage more often in recent years, and as anyone who’s been audited can attest, there’s few more distracting or disruptive exercises your organization can be put through.

Why Accurate Mileage Reimbursement Matters

Every reimbursed business trip your employees take in their personally-owned vehicles must be tracked, documented, and even reported to the IRS in the event of an audit. This is not as simple as just asking your employees the total number of miles they drove or collecting gas station receipts. The IRS requires a wide range of information when reporting mileage expenses: the business mileage, date, destination, and business purpose must be accurately tracked for each and every trip.

Without complete mileage logs, your employees are unable to substantiate their business travel and reimbursements – meaning they could fail their audit. And, while the employee would be responsible for paying penalties and back taxes, it raises an important question: could a failed audit cause the IRS to take a deeper look into your other mobile employees or your company as a whole?

Measuring Fleet Personal Use is Critical

Many employers find that providing fleet vehicles to their mobile employees can be a great tool, but only if the fleet program is administered correctly. Without accurate records of the business and personal mileage put on your cars, your organization could find itself on the wrong side of an audit.

Tracking business and personal mileage sounds simple, but becomes very complex when accounting for commute mileage. For many employees, the miles driven from their home to their place of employment is not considered business mileage. The IRS considers these “commuting miles,” which are not deductible and should be treated as personal mileage. Although this may seem obvious for traditional office-based employees, this 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.

For those employees who don’t regularly report to a traditional corporate office, the IRS generally considers 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 designation and mistakenly report their first and last trips of the day as business miles. This results in inaccurate fleet personal use reporting and increased risk in the event of an audit (and often additional fees), not to mention the lost costs of having under-applied any personal use chargebacks.

Technology Can Help

So what’s an employer to do? In the past, tracking and reporting accurate personal and business mileage created 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 track all of their employees’ business mileage expenses. By using the same technology that’s empowering the new digital workplace, business travel information can be collected, stored, and reported to the IRS without creating mountains of paperwork. Instead of pen-and-paper mileage logs, employers can leverage mobile apps to automate employee mileage tracking and accurately differentiate their employees’ exact business, commute, and personal miles – regardless of whether they’re being reimbursed or driving your company vehicle. With the right mobile applications and software platform, employers are able to eliminate manual tasks in the field (ultimately increasing productivity), reduce costs, and ensure IRS compliance – all while gaining insight into driving behaviors and mobile workforce efficiency.

The Bottom Line

Inaccurate vehicle programs not only cost employers thousands of dollars per employee every year, but they also increase the risk of costly audits. Companies that rely on inaccurate programs are guessing at their workers’ actual travel costs and can only hope the IRS doesn’t come knocking.

Advances in technology have made the often-cumbersome reporting methods of the past obsolete. 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. You may not be safe from root canals, but at least you’ll have 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.

The Author

Danielle Lackey

As Chief Legal Officer, Danielle is responsible for all Motus legal affairs and works with strategic business units to drive initiatives that bolster IRS and legal compliance for Motus clients. Prior to joining Motus, Danielle co-founded and served as CEO of Cadence Counsel, a company that helps law firms and companies thrive in an environment where work, as we know it, is rapidly changing. Before founding Cadence Counsel, Danielle practiced as a litigator at Latham & Watkins, representing major corporations and senior executives in complex civil and criminal matters. She earned her J.D. with Distinction from Stanford Law School and is a graduate of Brown University (Phi Beta Kappa, Magna Cum Laude).

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