If you are having trouble paying prior year tax liabilities, my best advice is to engage a local professional who will give your case the attention it requires. It is important that you reach out to a professional who will personally evaluate your case.

If you choose George Watson Taxman for your offer in compromise, I will invite you to my office to go over the case–you will not be dealing with a trained sales person over the phone. I will personally evaluate your case. After obtaining information from you, I will then advise as to whether I believe filing an offer in compromise would be successful in your case, and then I will quote you an approximate fee for my services.

While I cannot guarantee that your offer in compromise will be successful, I will use my experience to evaluate whether I think you have a reasonable chance. I do not put clients into offer in compromises unless I have a good faith belief that they will be successful. I will also tell you the weaknesses of your case up front. Either way, no surprises.

For your appointment, please bring the following:

• Copy of the last tax returns you filed
• Any correspondence you have received from the IRS or the state
• Any additional information requested

Most people already know the mileage from your house to your office in the morning is not deductible and that the mileage from your office when you come home in the afternoon is not deductible. This is referred to as “commuting” mileage. On the other hand, the mileage between the office and other business destinations during the day is deductible, as long as it is properly “substantiated” (see my blog on mileage logs). Thus, if one is an employee and merely drives to and from the office every day, then his mileage will not be deductible. But, being self-employed offers some tax-saving opportunities.

What are those opportunities? At first blush, the same rules should apply, and they do – the trip to the office in the morning and to home at the end of the day are NOT deductible. But, self-employed individuals have the option of establishing a “home office.” What that does is it transforms mileage that would otherwise be non-deductible into deductible mileage. Thus, if one starts out his day AT his office, then any mileage incurred for business purposes thereafter during the day is business mileage. So, the question becomes exactly what one must do in order to establish his home office so he can get a higher mileage expense deduction on his tax return?

The home office deduction is available to sole proprietors and S corporation employee/shareholders, not partners in a partnership. There are two requirements under tax law:

• The home office is used regularly and exclusively as the principal place of business for conducting your trade or business, and
• “Principal place of business” means used by you for administrative or management activities if there is no other location where substantial such activities are performed.

The home office has to be used “regularly” – occasional or incidental use is not enough. Use your home phone to make business appointments and receive business calls – forward to your cell phone when you are not at home. Keep your files and records at home, if possible.

It has to be used “exclusively” for business – you cannot use it to store clothes or to conduct other personal usage, for example.

The home office must be the place where you run your business. If there is another place you go to on a regular basis where you perform administrative and/or management activities, then the deduction could be disallowed. What are administrative/management activities? Billing customers, keeping books and records, ordering supplies, setting up appointments, forwarding orders, and/or writing reports are good examples.

How does one PROVE home office? The best way to prove it is by documentation – good ways to document home office would be to:

• Have all bills delivered to your home, as opposed to some other location.
• Have office supplies delivered to your home address.
• Have a second land-line for your home (the first is always presumed to be personal).
• Meet with clients at your home, of possible.

In a very few situations, the home office can be applicable to employees. Consult your tax preparer before taking this leap.

Is the home office a “red flag” for the IRS? I say NO, depending on your line of work. If you are a real estate agent, for example, the way you make your living is by showing houses, going from house to house. The tax law KNOWS this and expects that when a real estate agent files a tax return, he will most likely claim home office and also high automobile mileage. On the other hand, if you are an accountant working for a large corporation with offices in the city, then the IRS would more than likely anticipate that you would NOT claim home office or a large amount of mileage. Believe it or not, the IRS has these items plugged into their computers so they will spit out the taxpayers that are more than likely taking deductions to which they are not entitled.

Don’t try this analysis on your own – make sure you consult your tax advisor!

Historically, one of the largest deductions on my clients’ returns has been the deduction for standard mileage. Many clients accrue yearly deductions of $10,000.00 or more. But, they can only take the deduction if, and only if, they follow through with certain requirements of the Internal Revenue Code.

The tax law requires taxpayers to maintain books and records sufficient to substantiate the deductions claimed. If a taxpayer is unable to fully substantiate the expenses incurred, but there is at least evidence that deductible expenses were incurred, the Court may under certain circumstances allow a deduction based upon an approximation of expenses. However, in the case of expenses related to the use of “listed” property, specifically including any passenger automobile, Section 274(d) imposes heightened substantiation requirements to document the nature and amount of such expenses, thereby superseding the court case which allowed for approximation of other business expenses. Thus, as to automobile expenses, the taxpayer must maintain adequate records or other corroborating evidence to establish each of an expenditure. Specifically, elements of an expenditure include (1) the amount, (2) the time and place of the expense, and (3) the business purpose of the expense. The best way to take care of this is by keeping a contemporaneous mileage log.

In one case, when presented with a taxpayers who obviously used their vehicle for business purposes, but did not properly document the business usage, a judge announced:

“Undoubtedly, petitioners used their vehicles for business purposes during the year in issue. However, we are unable to find that petitioners’ mileage logs are sufficiently credible to accept them at face value, as we are convinced that petitioners both overstated deductible business miles and understated nondeductible commuting and personal miles.6 Thus, we conclude that petitioners’ mileage logs are not adequate records, within the meaning of section 274(d) and the regulations thereunder, of mileage expenses and that petitioners have failed to provide other corroborative evidence sufficient to establish that they have met the requirements of that section. See also Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).”

Don’t get caught in this predicament! Believe it or not, even I, your humble tax preparer, maintain a mileage log – and I do it on a DAILY basis. I write down the odometer reading and the business purpose at the beginning and end of each business trip. I do NOT do this for personal trips (like a visit to the grocery store) – even though at least one court has approved this method, it was a lower court and not an appeals court and therefore could be deemed at least a little aggressive. I also do this on a DAILY basis – there are court cases which disallow automobile expenses when the taxpayer goes back a year later and “reconstructs” his mileage log. So folks, the following is the very least of what I would advise for a mileage log:

• For each business trip, record the odometer readings at the beginning and end of the trip.
• Write down the name of the destination and the names of any people you visited or escorted to the destination.
• Write down the purpose of the visit, if not already obvious.

Yeah, I know this can be disruptive, for example, if you are a real estate agent showing a client 20 different houses in a day. In that case, there is no problem taking care of this at the END of the day. In fact, some agents simply do a “Mapquest” to get the appropriate mileage and record the odometer readings accordingly. Also, there is an I-Phone App out there.

No matter how you do it, just make sure you get it done – the deduction is definitely worth it!