Auto expenses are a very common deduction for business owners and employees who must travel. Often the taxpayer does not know the exact amounts necessary to calculate the proper deduction and the tax preparer must estimate the mileage, business percentage, and ultimate auto deduction with the client’s help. You need to have proper substantiation or, if the IRS examines your tax return, the deduction will more than likely be denied.
If the substantiation is lost or stolen, the IRS will generally deny the deduction because the Cohan rule (which allows a court to estimate deductible amounts of unsubstantiated expenses) cannot be applied for certain expenses, including automobile expenses (IRC § 274(d)(4)). In the case of a lost or stolen substantiation, combined with the nonavailability of contemporaneous records, substitute records may be provided, but they must include sufficient information to support the deduction (Temp. Treas. Reg. § 1.274-5T(c)).
Back in September of last year, the Tax Court in a summary decision upheld the Service’s disallowance of an auto expense deduction of a traveling salesperson due to lack of substantiation (Niyitegyeka, T.C. Summ. 2008-129). It was obvious that the taxpayer traveled for business and would ordinarily be entitled to a deduction, but the submitted evidence was too weak to allow it.
For a complete overview of the case, go to: