Photo courtesy of iStockphoto.com.

Photo courtesy of iStockphoto.com.

One of the oldest and most common corporate concerns is inaccurate expense reimbursement. In order to remain aboveboard, companies more often than not require validated receipts for any submitted expenses, and then utilize software systems to process and monitor irregularities and exceptions.

This practice is becoming commonplace in the management of traditional travel reimbursement expenses. But, for companies who have employees who drive for work — whether in a company vehicle or a personal vehicle — the lack of software management systems sets employees up to fail, and almost always results in significant losses for the company.

To put a specific number on this, travel expense fraud costs businesses $2.8 billion per year and, according to a recent study released by Chrome River, over-reported business mileage makes up 34.5% of these fraudulent claims. That’s nearly $1 billion of fraudulent mileage reimbursements.

At A Glance

Mileage reimbursement often is rife with fraud and inaccuracy because it:

  • Relies on manual submissions.
  • Often approaches reimbursement calculations in a one-size-fits-all approach.
  • Doesn’t clearly set methods to separate business and personal miles.
  • Treats employee drivers as national averages and not as individuals.

Easy to Commit

Mileage fraud is the easiest type of fraud to commit, because it often goes unnoticed, and is routinely the result of honest mistakes or efforts to oversimplify reporting.

The instances of this type of fraud are multiplied for companies with large numbers of mobile workers, in industries as diverse as pharmaceutical sales to food and beverage merchandisers to delivery companies. Whether these mobile employees drive a company-owned vehicle or are authorized to use their personal vehicle for business, oftentimes commute, business, and personal miles get muddled together, leading to misreported mileage and sometimes higher reimbursements (or lower personal-use chargebacks) than employees are fairly entitled to. Conversely, by not having an accurate way to separate and account for these mileage types, employers often over or under reimburse/charge their employees. On its best day, the status quo for mileage capture is inaccuracy.

There are ways that fleets can put the brakes on fraudulent, inaccurate, and unfair mileage reporting. When equipped with the right tools and methodologies, corporate fleet managers have the power to take mistakes and guesswork out of the equation, saving the companies they serve billions of dollars each year. And drivers, too, are empowered with these tools, which allow them to simplify and accurately report mileage, as well as ensure they are being reimbursed or charged fairly and transparently.

Understanding the Root of the Problem

In order to fix a problem, one must first understand the root of the problem. When it comes to mileage fraud, the cause is usually easy to identify. It’s typically due to systems that will often:

  • Rely on self-reported, non-validated mileage data.
  • Require guestimates and/or burdensome processes to achieve accuracy. 
  • Allow for individual policy interpretation around such issues as commute or personal miles.
  • Simply treat every employee as a national average with respect to reimbursement or chargeback amounts.
  • Some combination of the above. 

Systems built on these parameters are rife with inaccuracy and ripe for ensuring that both employees and their employers fail to account for accrued mileage.

Perhaps one of the biggest reasons that mileage fraud is so prevalent is the acceptance of self-reported mileage, which many companies allow. In fact, the Chrome River study found that, of those who commit mileage fraud, 76% use manual submission processes to report their inaccurate information.

Manual submissions that require an employee to report his or her mileage expenses are dependent on the “honor system” for accurate, honest reporting. By comparison, imagine in this day and age reporting business dinner expenses, airline ticket costs, or last night’s hotel room fees via an “honor system.” It’s laughable. According to a survey conducted by KDS, about 1 in 5 business travelers exaggerate mileage by rounding to the nearest one, five, or 10 miles. Simply rounding by a few miles here or there — which may equate to only a few dollars in a single instance — can become millions of dollars of driver expenses over time if enough fleet drivers resort to rounding. To put this in perspective, I think of Providence, R.I., as being 60 miles from Boston instead of its geographically accurate and verified 58.7 miles. We’re all guilty of rounding, if left to an inadequate, streamlined approach.

In most cases, mileage fraud isn’t fraud at all. It is often unintentional. The same KDS study found that 67% of business travelers record actual mileage, and 11% even round down to the nearest mile, unfairly benefiting the company.

Adding up Mileage Fraud

Regardless of number rounding, even the most well-intentioned employees can mistakenly report incorrect mileage without realizing it. One such instance is the classification of business and personal mileage when it comes to determining whether a commute is reimbursable.

The IRS’ guidelines for commute mileage are often misinterpreted, particularly as it pertains to designating the appropriate type of office for each employee (e.g., home office, no office, corporate office). Many mobile workers mistakenly report their first and last trips of the day as business miles, even if the IRS guidelines state for certain office designations that these should be considered commute miles. Even unintentional misinterpretations such as this example result in increased risk to employees in the event of an audit, and increased costs for employers who may be over reimbursing or under charging employees for these miles.

Over time, these extra miles and inefficiencies add up, and end up costing a company much more in reimbursements than they are legally obligated to pay (and, on the flip side, even greater dollar amounts in legal settlements if it’s not adequately reimbursing employees for the business costs they incur).

Conversely, if an employee mistakenly under reports his or her business mileage, he or she will lose out on reimbursements he or she is fairly entitled to. Many of these inefficiencies have flown under the radar because, unlike hotels, airlines, or restaurants, vehicles don’t spit out accurate receipts that can be used for reimbursement.

Promoting Bad Behaviors

Inaccurate mileage reimbursement, however, does not occur solely through fraudulent or mistaken mileage reporting. In fact, many reimbursement programs in use today — specifically those that compensate all drivers a flat amount — promote undesired behavior that can lead to inaccurate or unfair compensation.

Many companies use taxable car allowances or cents-per-mile rates to reimburse their mobile employees. These “one-size-fits-all” programs often end up over reimbursing some employees while under reimbursing others. A cents-per-mile program reimburses a fixed cents-per-mile rate for all mobile employees, but doesn’t take into account location-specific cost differences. As a result, it can incentivize employees to drive more (or just report more) to rack up miles they’ll be reimbursed for.

Another common reimbursement method is the car allowance, which uses a single, company-wide rate to reimburse all employees for any business driving. Using this model, a company may choose to give all of its employees a flat $500 per month stipend. However, this method is equally prone to error, as it treats reimbursement as compensation (and the company and its employees are taxed accordingly), and also doesn’t take into account location-specific costs of each employee.

A handful of companies that reimburse their employees through these fixed-amount monthly stipends also sometimes choose to provide fuel cards for purchasing gasoline. While these company-provided fuel cards are not commonplace in most vehicle reimbursement programs, they almost always tend to result in abuse if they aren’t closely monitored. What happens more often than not without careful monitoring is that companies end up paying for a lot of their employees’ personal driving — after all, it’s impossible to partition a gas tank for personal and business fuel.

Finally, for those organizations that provide company-owned/leased vehicles, the overwhelming majority allow their employees to drive these vehicles outside of normal business hours. Most organizations rely on employees to self-report their personal-use percentage each year, as the IRS requires that employees be taxed for the “perk” of using a company-owned vehicle for personal use. Without the appropriate technology and processes in place to accurately capture personal and business mileage, employees often understate personal use and are, therefore, inaccurately taxed or undercharged by their employers for the personal use of the company’s vehicle.

Getting a Handle on Accuracy

What’s most frustrating about mileage fraud is that it is one of the easiest losses to avoid if businesses are able to put the proper reporting protocols in place. In order to reach truly fair reimbursements, companies should calculate rates for each driver, not all drivers.

The best way to ensure vehicle reimbursements are fair, accurate, and in-line with IRS standards is to use a fixed and variable rate (FAVR) reimbursement program that provides custom reimbursement amounts for each employee. Unlike the one-size-fits-all reimbursement methods outlined above, FAVR programs provide customized reimbursement rates that account for the unique, individualized costs employees incur each month. These include geographic and mileage-related costs that account for both current fuel prices and employees’ individual business mileage. By taking these unique variables into consideration, FAVR reimbursements more accurately reflect the driving costs that each employee incurs. To top it off, a FAVR program even has the ability to update reimbursement rates based on changes in costs (e.g., fuel) throughout the year, and is the only reimbursement methodology that is recommended by the IRS.

The Bottom Line

In order to provide accurate reimbursement and personal-use chargeback programs, companies need a way to capture and review employees’ business mileage, or accurately capture the personal use of their company vehicle.

Tracking mileage can be done manually through Excel spreadsheets, but with so many variables in play, this is a tedious and burdensome process for both employees and their managers. Not all employees will accurately record how many miles they actually drove — they’ll estimate or unintentionally miscalculate what they’ve driven to varying degrees. Their managers — who are potentially working with inaccurate mileage logs to begin with — will need to devote days or weeks to calculating reimbursement rates for each driver, with each mileage count, in each region if they hope to be accurate.

Thanks to the development of new mileage tracking and vehicle management technologies, however, implementing and managing a company-wide vehicle program is easier than ever. With these technologies, companies have the ability to collect and monitor enormous amounts of variable data automatically and in real time, ensuring each employee is reimbursed only for their business mileage (or charged only for their personal mileage), in their specific location, for any given time period.

Through these technology platforms, companies have the power to automate mileage capture in the field, streamline mileage submission and payments/charges, and provide full visibility into driver expenses, accurately documenting all of the information required by the IRS — from miles driven to the purpose of each visit.

When drivers transition from manually reported mileage to automated mileage capture, companies, on average, see a more than 20% reduction in business mileage that is submitted at the end of each month — mileage that was inaccurate, over inflated, and should not have been reimbursed. By combining a FAVR reimbursement program with a technology platform to automate mileage capture and reimbursements, companies can achieve a vehicle program that’s accurate, easy to manage and — above all else — fair to both the employee and the company.

About the Author: Craig Powell is president and CEO of Motus, a cloud-based mobile enterprise platform that provides mileage reporting. When not leading the charge toward the future of mobile workforce management, he sits on the boards of the charitable organizations Your Grateful Nation and Beat the Streets. He can be reached at [email protected]

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