While business taxes are truly a year round affair, what you do after the New Year and before April 15th is especially important. If you mismanage the process in any way, there is a whole assortment of penalties your business could face for a variety of IRS violations. These penalties can add up, especially because if you don’t pay in full, you’ll be forced to pay interest on the fee.
Another layer of complexity is added to your business taxes if your company’s employees travel as part of their jobs using their own vehicles. If you reimburse your employees for travel in their own cars – as you rightly should – then you want to make sure you follow the IRS’ employee mileage reimbursement rules to prove the deduction. Understanding what can result in penalties and what the employee mileage reimbursement rules are will help you successfully prove your deductions and avoid paying any more than you have to to Uncle Sam.
What the IRS Penalizes For
According to the IRS, “If you do not file your return and pay your tax by the due date, you may have to pay a penalty. You may also have to pay a penalty if you substantially understate your tax, understate a reportable transaction, file an erroneous claim for refund or credit, or file a frivolous tax submission. If you provide fraudulent information on your return, you may have to pay a civil fraud penalty.” Then of course, they also combined penalties for situations with multiple offenses. If you provide fraudulent information that leads to substantial understatement for example, that’s two penalties, not one.
Let’s break this down, though. Each penalty carries its own fees.
Late Payment: For not paying your taxes by the due date, you face a penalty of 0.5% of your unpaid taxes for each month, or part of a month, you fail to pay.
Late Filing of Tax Returns: Your penalty for late filing will be a 5% for each month, or part of a month, that the return is late, but not more than 25%. Your penalty will be a minimum of $135 or 100% of the tax on the return if you file more than 60 days after the due date.
Inaccuracies: There are several accuracy-related penalties. The two most common are the substantial understatement penalty and the penalty for negligence or disregard of rules or regulations. The cost for both is a flat 20% of the net understatement of tax. You may be able to avoid penalties for inaccuracies, if you can prove you have a reasonable basis for your position and that you acted in good faith.
Fraud: Your underpayment or late payment is considered tax fraud when it can be proven to be intentional. The penalty is 75% of the underpayment. Negligence or ignorance aren’t considered fraud.
Frivolous Reporting: The IRS defines frivolous reporting to be when a return doesn’t include enough information to figure out the correct tax or when it contains information that clearly shows the tax your reported is substantially incorrect. The penalty for being lazy is $5,000. This penalty can also apply to other types of submissions.
Avoid Risk of Penalties in Your Reimbursement Process
Some of these penalties are relatively simple to avoid. Late returns and late payments can be avoided by staying abreast of the tax calendar and the necessary forms you need to keep track of. Of course, how you do your taxes affects your schedule. Do you file annual or quarterly tax returns? Do you file electronically? Other penalties, such as those for underpayment or frivolous reporting, require a little more attentiveness. Then, there are rules you must follow to ensure your deductions are acceptable and won’t lead to penalization.
Tracking Expenses: Not only will tracking all business expenses help you avoid extra penalties, it will make filing returns a lot easier. This is an important rule for all employees to follow, whether they’re buying office supplies, booking travel to a conference or driving their own cars to jobsites in your service area. If you plan to give reimbursements for these expenses, you need to make sure the reason is clearly stated and substantiated with receipts, invoices or mileage logs.
Recordkeeping: A guaranteed way to avoid accusations of negligence, underpayment, frivolous reporting or a myriad of other penalties is to maintain organized, up-to-date records. These will help you prove your authority for the treatment of a tax item in question and show the IRS that you acted in good faith. Should you ever be subject to an audit of your business financials, good recordkeeping will prevent many headaches, too. Along with saving receipts and invoices, expense reports and reimbursement requests from your reimbursement approval process should also be stored for easy retrieval at a later date.
Using the IRS Mileage Reimbursement Rate: The IRS has its own rules and regulations regarding employee mileage reimbursement. These reimbursements are tax deductible, but to determine how much to pay employees, you can either go the route of calculating the actual expense your employees incur from operating a vehicle for work, or you can use the standard mileage rate. You can also reimburse mileage at your own rate. One thing to note if you plan to reimburse mileage at a standard rate is that if you pay employees for their mileage at a rate higher than the one the IRS sets, the difference is taxable. You cannot simply claim a deduction for mileage reimbursement at a rate you determine yourself without proving the reasoning. Otherwise, you may end up paying taxes on these reimbursement payments.
Having an Accountable Plan: To prevent your business mileage and expense reimbursements from being counted as taxable wages, there are a few other employee mileage reimbursement rules to follow as part of an accountable plan. These include accurately reporting business-related expenses in a reasonable timeframe, adequately proving the expense’s purpose and amount and promptly returning any excess payments. If your business doesn’t follow these rules, then your expense reimbursements are counted as income by the IRS making them subject to withholding and must be reported on employees’ W-forms.
Be Sure of Your Business Expenses
Your employee mileage reimbursement rules are never more important than during tax season. The IRS is the reason you do all of this work – carefully tracking expenses, meticulously keeping records, maintaining an organized, well-documented reimbursement process – so that your business can avoid senseless penalties. Luckily, it’s 2020 and we have technology to make the process even less troublesome.
SureMileage from CompanyMileage puts a powerful mileage expense reimbursement tool in the hands of every employee at your company. The business mileage of each trip is calculated using point-to-point calculation and saved throughout the day. With our Quick Capture feature, employees can check in and save their location with a single tap of their finger. At the end of the day, they simply organize their trips and submit for reimbursement. Our system automatically carries reports through the reimbursement process, configurable to your company’s structure and specifications. We also integrate with all major accounting and payroll systems, so not only will reimbursements be approved faster, employees will also receive payments faster, as well.
With a tool like SureMileage, you’ll no longer need to worry about the tax-readiness of your mileage reimbursement program. Track expenses, maintain reporting and have all the data you need right at your fingertips. Request a demo with CompanyMileage today and see how it works for yourself.