Remember how well those excuses we told our parents and teachers worked? They don't work any better when you use them for your taxes.
The Tax Court judges have heard them all. Some of my favorites:
All these excuses are fun to read, but a lot less fun to try to make to an IRS agent or a judge with a straight face. It's always better to not need an excuse. Keeping thorough records for your business is a great place to start, and keeping a secure backup copy somewhere is better. You need to keep those records long enough to get through all IRS exams. While the IRS usually can only go after you for three tax years, sometimes they get six, so keep your tax records for seven years.
Good recordkeeping is even more important if you have travel and entertainment expenses. While the tax law allows judges to estimate business expenses if they have some basis for doing so (don't count on this), this doesn't go for meals, entertainment and travel deductions. You have to maintain timely records that include the time, place, amount and business purpose of these expenses, and you have to keep your receipts. The records have to be "contemporaneous," meaning you have to keep them as you go.
All right, fine. That's a hassle. If the IRS comes, I'll do my log then. That works, right? Well it didn't work for a Florida real estate agent, who said she kept track of her miles on a day planer. The Tax Court noted a discrepancy:
... the day planner included an order form which provided a convenient way for the owner to purchase a new day planner for the coming year. In this case, the order form was for the calendar year 2014, a fact that completely undermined [her] testimony that she recorded information in the day planner contemporaneously in 2008.
Maybe some people just like to order their day planners five years ahead.
Another taxpayer, a traveling salesman, showed up in Tax Court with mileage logs that showed some amazing driving habits:
The most serious problem came from discrepancies in his mileage logs. He operated four vehicles during the 2009 tax year: a truck, a 1999 Jeep, a 2002 Acura, and a 2007 Acura. Mr. G claimed at trial that he recorded his daily mileage by writing the starting and ending odometer readings for each trip on a Post-it note. After he recorded the number, he would stick the Post-it note in his Day-Timer. But the mileage log for the 1999 Jeep stated that its odometer read 118,905 miles on January 1, 2009, while a Carfax report on the same vehicle showed an odometer reading of 126,121 in November 2007. Mr. G said that after he had the Jeep’s dashboard replaced there was a “new starting mileage” on the Jeep. But we also spotted a similar problem in the logs for Mr. G’s 2002 Acura: In November 2008 the Acura had an odometer reading of 109,422, but by January 1, 2009, it had run backward to 103,723. This time, Mr. G admitted that he couldn’t account for the discrepancy.
There must have been a mechanical problem. The car was stuck in reverse, and he had to drive it that way until he got it fixed, maybe? Whatever happened, it didn't get the taxpayer out of extra tax and penalties.
If you are a road warrior, keep track of mileage as you go. Write down the miles, who you are visiting, and the reason for the visit in your day planner or a car log. If you want to keep it handy and backed up, use one of the many smartphone apps designed for tracking business mileage. And drive safely!