How to Prevent Problems with Mileage Expenses

Businesses can avoid trouble with mileage expenses by following a few simple rules.

For starters, businesses can deduct mileage expenses only when certain standards are followed. The same requirements apply to self-employed individuals deducting business mileage, and companies that reimburse employees for business miles.

Adequate records are required for business mileage deduction. They must document the date, place and business nature of the vehicle use. Employees who obtain reimbursement for business miles must provide this record to you. A single record is permitted for several business stops on an uninterrupted trip. Minimal personal use is considered an uninterrupted trip.

The Internal Revenue Service (IRS) establishes a standard mileage rate at least annually. The tax deduction for mileage cannot exceed this rate. Because the rate is announced in advance, you can obtain it from the IRS website or your accountant.

Your employees must return any reimbursements that exceed the standard mileage rate or that aren’t substantiated by records provided to you. In addition, employees must provide their business mileage records within a reasonable amount of time. The IRS considers 60 days after incurring the business miles as reasonable.

Mileage reimbursements are not taxable income to employees who provide the required records and receive no more than the standard IRS rate. When these conditions are not met, the excess reimbursement is added to employee compensation and reported on the annual Form W-2.

How You Should Handle a CP2000 Notice

Correspondence from the Internal Revenue Service (IRS) can produce a fright in the recipient, but there’s usually no cause for alarm.

The most frequent letter sent by the IRS is the CP2000 notice. Its purpose is simply to convey proposed changes to a tax return.

A typical trigger for this is math errors on your tax return or the apparent omission on your return of income that was reported to the IRS by parties that paid you.

How to Read the Notice

Every CP2000 notice itemizes the details for a proposed change and states the tax liability impact. Sometimes, no additional tax is owed. Many notices do not require a response to the IRS. Even when a payment is required, you need to return only the signature page along with a check if you agree with the changes.

You should read the notice carefully before forwarding it to your accountant.

If the notice indicates that some income was omitted from your return, you must determine if you really received the income and whether you conveyed it for preparation of your return. If you disagree with the IRS notice, your accountant can help you prepare a response. You might disagree with some, or all, of the proposed changes described in a CP2000 notice. You need documentation to support any dispute.

Types of Responses

A common cause for a CP2000 notice occurs when a payer of money to you reported that amount on a Form 1099 to the IRS.

When your tax return doesn’t appear to include that figure, the IRS proposes the change to your tax return by issuing the CP2000.

Additional tax is assessed on omitted income. For example, you might receive a notice for omitting some of your interest income. In that case, the notice proposes extra tax owed.

If the notice is correct, all that’s required is signing and returning it with a payment.

However, depending upon the nature of the income, you may have certain expenses to deduct against the amount paid to you and reported on Form 1099.

In that case, your accountant can help you prepare an amended tax return that reports the originally omitted income as well as the ordinary and necessary expenses that are deductible before making the tax calculation.

Act Quickly but Carefully

The IRS reviews responses to a CP2000 and issues a new notice if there’s a correction in the tax assessment.

When the IRS does not approve any changes to the original CP2000, a notice of tax owed is sent. After that, there’s no recourse other than paying the tax or petitioning the United States Tax Court.

A taxpayer is normally given 30 days to reply to a CP2000 notice. An extension for more time is customarily granted when you are preparing documentation for a response or an amended tax return.

Before final resolution, an outstanding CP2000 notice simply means that you’ve been notified of proposed changes to your tax return.

If you sign and return the notice, you have agreed to the changes and are no longer entitled to dispute the assertions.