Self-employed people, including owner-operators, get audited more frequently.
Relax. It’s unlikely the Internal Revenue Service is going to audit your tax return. Only 0.5 percent of returns filed in 1998 were audited. On the other hand, self-employed people, including owner-operators, get audited more frequently. That’s because they have more opportunities to hide income or to mask personal expenses as business expenses.
The IRS has up to three years to audit your return, says Doug Kozeny, vice president with Truckers Professional Services in Omaha, Neb. So don’t assume that because you’ve slipped by for months, or even a few years, that you’re in the clear. Furthermore, if fraud is involved, the agency can extend its long claws back as far as it likes.
Kozeny offers these tips on keeping down the red flags before the IRS:
KEEP EXPENSES REASONABLE. The IRS maintains average ratios for expenses in every industry. For example, Kozeny says, “They know fuel should be in the range between, say, 15 to 30 percent. If fuel is 40 percent of your gross income, that could spur an audit.” Even with small expenses, such as truck washes, document everything. Try not to overspend in any category. “IRS agents receive a lot of training within specific industry codes,” Kozeny says.
MAINTAIN A REAL RESIDENCE. The theory behind reimbursing meal costs is that eating on the road duplicates your food expenses; if you’re living out of your truck, then you’re never inconvenienced by being away from home. Make sure you can at least show rent and utility payments on a rental property so you can claim per diem expenses for meals.
CATEGORIZE ALL EXPENSES. Don’t label something “miscellaneous” when you can be more specific. “I’d rather put it down as a truck supply, or a road expense, or repairs and maintenance,” Kozeny says.
MAINTAIN SEPARATE ACCOUNTS. Keep separate checking and credit card accounts for your business and personal expenses. Besides keeping the IRS happy, this enables you to better analyze your business.
USE AN INFORMED ACCOUNTANT. With so many industry-specific aspects of taxes, you might not get the best service from someone unfamiliar with trucking. And even with a knowledgeable accountant, make sure you’re comfortable with the validity of your deductions. “The taxpayer is ultimately responsible for what goes on his return,” Kozeny says. However, he says, a trucking accountant should stand behind his work to the point of paying for penalties that result from his errors or poor judgment.
The IRS announced last fall that it will focus its audit guns on certain areas, including unreported income, “the largest component of the tax gap.” The agency has long assigned each return a score that rates the probability of inaccurate information. Now returns will get another score for the probability of income being omitted.
April 15 is only one of four tax deadlines facing owner-operators. Estimated quarterly tax payments are due April 15, June 15, Sept. 15 and Jan. 15. Owner-operators who conveniently ignore these dates face the risk of paying interest and a 0.5 percent per month penalty on the missed payments. Of the 61 percent of Overdrive readers who pay estimated quarterly taxes, almost half purposely put aside money for it: