Office Auditor Can Disco Too

Overview:
During the 1970s and 1980s, mobile DJ services were commonly known as mobile discos. The term was originally coined in the UK and gained widespread popularity, especially among those who provided their own sound and lighting equipment for private events like weddings and parties.

That was the case with a taxpayer who traveled locally with his mobile DJ services, claiming a ton of his van expenses during the process. For over a decade, his business netted huge losses. He was under the IRS radar, but the day of reckoning came. Not only one tax year was selected for examination, but all three years within the statute period. Was his business a hobby or an activity engaged for profit? An activity is presumed for profit if it makes a profit in at least three of the last five tax years.

There were a number of business expenses that were listed for audit, including his big deduction. In his search for a competent tax pro, he reached out to us for tax help. First, we had to defend his losses, then review his selected tax write-offs with what documentation he could muster. When it came to supporting his business mileage – his log was lost. No problem, I took out my legal yellow pad in trying to reconstruct his comings and goings. Keep in mind, I had to be credible in my presentation on his behalf. I drew up areas that he traveled to and calculated his business travels. Compared to what he claimed – the mileage was significantly less now.

Proposed Results:
The Tax Auditor (now known as Tax Compliance Officer) swiped her pencil and allowed only the expenses that were verifiable, including a revised auto allowance. The three tax years plus the assessment of their infamous 20% accuracy related tax penalty, resulted in a $36,000 proposed balance.

Appeals Strategy:
My client was upset, not with my service, but with the outcome. Exercising our rights, we disagreed and requested an independent appeal. It took the IRS about a year to schedule for a phone appointment to discuss the case. I called my client in so that he could provide clarity and responses when asked.

Outcome:
The Appeals Office (Revenue Agent), in her interview, went over the merits of the issues, and believed us and accepted what was disallowed, but upheld the adjustment to the biggest tax deduction – the mobile disco mileage. I guess she didn’t see my yellow pad circles of. This resulted in a reduction of the taxes and penalties by about $33,000. After the phone call, my client was emotionally grateful.

Take Away:
To comply with IRS requirements for business auto mileage records and supporting documents in the event of an audit, you must maintain detailed and timely logs that distinctly separate business and personal mileage, along with clear supporting documentation for all claimed expenses.

The IRS accepts various log formats: paper logbooks, spreadsheets, or mileage tracking apps are all valid as long as required information is included.

By following these requirements and tips for recordkeeping, you can protect your business from denied deductions or penalties if audited by the IRS

My only regret was not drawing bigger circles on my yellow pad – who knows what the end result might have been.

Next Story – stay tuned! Hardest audit defense, taking over in a 2nd round of a corporate tax audit case that ended in a reduction of the Revenue Agent’s proposed assessment, then going back door negotiating for a settlement for less than the amount.

Office Auditor Can Disco Too

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