The IRS verifies that a vehicle is used for personal purposes primarily through detailed record-keeping and reporting requirements. When an employer provides a company vehicle that an employee uses personally, the personal use portion is considered a taxable fringe benefit that must be included in the employee’s wages. To determine and verify personal use, the IRS expects accurate tracking of dates, miles driven, and the purposes of trips—distinguishing personal mileage from business mileage.
Here are key ways the IRS verifies personal use of a vehicle:
- Mileage Logs and Records: Employers and employees must keep detailed records showing the total miles driven and which miles were for personal use. This documentation serves as evidence for the IRS to substantiate any personal use claimed and reported.
- Valuation Methods for Personal Use: Several methods exist to calculate the taxable value of personal use based on the vehicle’s fair market value or lease value combined with the percentage of personal miles. This valuation must be reported as income:
- General Valuation Method considers the cost to lease a similar vehicle.
- Annual Lease Value Method uses an IRS-provided lease value table multiplied by the personal miles percentage.
- Wage Reporting: The value of personal use must be included in the employee’s wages on the Form W-2, and the employer must withhold applicable payroll taxes. This reporting creates a paper trail for the IRS to verify compliance.
- Standard Mileage Rate Use for Business vs. Personal: When using the standard mileage rate to deduct business vehicle expenses, taxpayers must choose the business use in the first year and maintain records supporting the business use percentage. Personal use miles are not deductible and must be separated clearly.
In summary, the IRS relies on thorough mileage records, valuation of personal use, and proper wage reporting to verify that a vehicle is used for personal purposes. Without accurate documentation and reporting by employers and employees, the IRS may challenge deductions or tax benefits related to vehicle use.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-does-the-irs-verify-that-the-vehicle-will-be-used-for-personal-purposes/
