| Having accurate books and records are requirements | | | | example, ideally the taxpayer would have annual |
| of all businesses and individuals seeking to take income | | | | mileage logs indicating the destination of the business |
| tax deductions. However, in reality, businesses and | | | | trips, the business purpose, the individual(s) that were |
| individuals may not have all the required documentation | | | | met, the date and the number of business miles |
| and/or receipts to fully support each of their | | | | incurred. This mileage log will substantiate the number |
| deductions. With this in mind, as professionals we ask | | | | of business miles that the taxpayer has driven and it |
| the question - when can a taxpayer estimate tax | | | | will be likely that the IRS would accept this form of |
| deductions? | | | | documentation as support for the taxpayer's mileage |
| According to the American Institute of Certified Public | | | | deduction. Moreover, this evidence is crucial to defend |
| Accountants (AICPA) Professional Standards, "unless | | | | the deduction during an audit. The lack of the mileage |
| prohibited by statute or rule, a member may use the | | | | log may cause the reversal of the mileage deduction. |
| taxpayer's estimates in the preparation of a tax return | | | | For example, in Tax Court Case Krist v Commissioner, |
| if it is not practical to obtain exact data and if the | | | | TC Memo 2001, the court found that "the taxpayer |
| member determines that the estimates are reasonable | | | | failed to bring forth any evidence substantiating his |
| based on facts and circumstances known to the | | | | claimed vehicle expenses. The court also noted that |
| member. If the taxpayer's estimates are used, they | | | | expenditures must be documented by means of |
| should be presented in a manner that does not imply | | | | account books, diaries, logs or other evidence. Here, |
| greater accuracy than exists." In other words, an | | | | the taxpayer's lack of any documentary evidence of |
| estimate should look like an estimate. | | | | expenditures prevented the court from approximating |
| For instance, if a taxpayer estimates business mileage | | | | expenses and ultimately barred their deductibility." |
| to be 1,000 miles - this looks like an estimate. However, | | | | However, if you have incomplete documentary |
| if the same taxpayer informs you that their business | | | | evidence the IRS may allow mileage deductions under |
| mileage is 1,125 miles - this appears to be an accurate | | | | certain conditions. Per IRS Publication 463, if you do not |
| number. | | | | have complete records to support a deduction, |
| The basis of this position by the AICPA Professional | | | | sampling may be an option. Specifically, a taxpayer |
| Standards is as follows - "accounting requires the | | | | can keep adequate records for a portion of the year, |
| exercise of professional judgment and, in many | | | | such as a detailed mileage log, and if the sample is |
| instances, the use of approximations based on | | | | representative of business periods throughout the |
| judgment. The application of such accounting | | | | year, the IRS most likely will allow your mileage |
| judgments, as long as not in conflict with the methods | | | | deduction. |
| set forth by a taxing authority, is acceptable. These | | | | With this in mind, it is clear that estimating tax |
| judgments are not estimates within the purview of this | | | | deductions is allowable unless specifically in conflict |
| statement. For example, a federal income tax | | | | with methods set forth by a taxing authority. However, |
| regulation provides that if all other conditions for | | | | in any case these estimated deductions need to be |
| accrual are met, the exact amount of income or | | | | supported by evidence to obtain a tax benefit on a |
| expense need not be known or ascertained at year | | | | taxpayer's return. In other words, the estimated |
| end if the amount can be determined with reasonable | | | | deductions that a taxpayer makes need a reasonable |
| accuracy." | | | | basis and supporting evidence to be a valid business |
| By referring back to the aforementioned mileage | | | | expense. |