In this episode of the podcast, Trucker CFO Colton Lawrence will be tackling the topic of tax audits. In addition to covering the key points on this subject, Colton will be addressing many of the questions that owner-operators and independent contractors have related to tax audits.
TRANSCRIPT
Announcer:
Coming up next on The Trucker CFO Podcast, you'll hear from Colton Lawrence, The Trucker CFO. In this episode of the podcast, Colton will be addressing the topic of tax audits. Here’s a preview…
Colton Lawrence:
Within the IRS, they have a computer system that is looking for specific triggers. And as tax returns come into the IRS system, there is a software that is looking through and comparing different amounts from different sections of the tax return. And as it compares and analyzes these numbers and bounces these numbers off of the reported earnings that they have received from various companies that have reported on you such as your 1099 and your W-2. They're looking for errors. They're looking for mis-statements. And this software compares and analyzes all of this and at the end of the process spits out certain individuals to be audited.
Announcer:
Welcome back to The Trucker CFO Podcast. Thanks for connecting with us again here on PodWheels. As we've shared with our listeners in previous episodes of the series, Trucker CFO is focused on exploring the business, accounting, and tax topics that matter most to truckers, particularly the men and women who move the nation's economy as owner-operators, independent contractors and professional drivers. This podcast is also dedicated to the business needs of the fleet owners and small trucking businesses throughout the country.
PodWheels is proud to have the opportunity to partner with Trucker CFO in the development of this podcast series. During its many years of service in working with owner-operators and independent contractors, Trucker CFO has become a trusted resource and a leader in the trucking industry for providing tax, accounting, and business advisory services for professional drivers.
As we mentioned at the top of the podcast, The Trucker CFO Colton Lawrence will be our featured guest and with this episode of The Trucker CFO Podcast, Colton will be tackling the topic of tax audits, addressing many of the questions that owner-operators and independent contractors have related to tax audits.
Colton will once again be joined on the podcast by Greg Thompson, the Executive Producer of PodWheels. Along with asking questions of interest on this topic, Greg will be covering the key points with Colton related to tax audits. As always, Trucker CFO and PodWheels would like to remind our listeners to please keep in mind that every tax and business situation is unique. In addition, the perspective shared on this podcast should not be considered as tax advice. If you have questions regarding your specific tax situation, you should consult a qualified tax professional. During the podcast, we'll be sharing information on how you can connect with Trucker CFO.
Now let's join the conversation with Colton Lawrence and Greg Thompson, Colton connected to the PodWheels studios through Zoom audio.
Greg Thompson:
Hello again everybody. Greg Thompson from PodWheels back with you on The Trucker CFO Podcast. I'm joined once again by the Trucker CFO and that’s Colton Lawrence. And Colton, today we're talking about audits. And when I hear the word audit, there's a lot of things that come to mind. There's some fear. There is concern. But at the same time as we walk through what we're going to share with folks today, an audit can be one of those things that yes, there is a little bit of fear. There is some concern. In some ways, I compare it to going to the doctor's office because sometimes you got to go to the doctor's office, and sometimes they do examinations for men and women that are uncomfortable but they work out okay in the end.
Colton Lawrence:
We're going to talk about some of those things that can cause you added stress when it comes to an audit. And we're gonna talk about some of those things that can flag you for an audit. And we're gonna generally speak about what an audit looks like, how you might be notified of an audit and discuss the things that can make this situation as stress free as possible.
Greg Thompson:
One of the reasons that we've included an audit podcast in our collection here is the fact that audits happen most often with folks who are self-employed. The rate of audit for folks who are self-employed like owner-operators, independent contractors, small business owners are much greater than they are for the general population.
Colton Lawrence:
Absolutely. Amongst the general population, the audit rate is a very low 0.6%. That means just over one half of a person out of 100 will be audited. When you look at small business owners and this pertains to our independent contractor and owner-operator truck drivers, that rate jumps by four times to 2.3%. That's a really big increase. And just the fact that you are self employed is in and of itself a flag that the IRS will look at for you to be audited.
Greg Thompson:
Well Colton, as I hear you share these numbers. It makes me think because I know that I have my company as an LLC. I know your company is also an LLC and the folks that were talking with their owner-operators, they're small business owners. And when you look at that rate of 2.3% versus 0.6% that is something that catches your attention right away. And I know that the Schedule C is one of the first places that gets an examination by the IRS.
Colton Lawrence:
Correct. The Schedule C is one of the predominant ways that self employment earnings are reported on the tax return. This is the form that is used for sole proprietors. It is the form that is used for single member LLCs. And if you have gross receipts on that Schedule C of $100,000 or more, you're going to fall into that audit rate of 2.3%. And frankly that will be most independent contractors and owner-operators. When you look at the 1099s that they received from the motor carriers. If they've done the average number of miles or more, those 1099s are going to be in that $150 to $250,000 or more range. And as we've said that will cause them to face a higher audit rate.
Greg Thompson:
Well Colton, when we talk about self employment, obviously from the numbers, we've hit on one of the bigger triggers for who might be more apt to get an audit. But let's talk a little bit more about earnings and how the IRS identifies individuals for audit.
Colton Lawrence:
So there is definitely some randomness to the way audits are generated. But within the IRS they have a computer system that is looking for specific triggers. And as tax returns come into the IRS system, there is a software that is looking through and comparing different amounts from different sections of the tax return. And as it compares and analyzes these numbers and bounces these numbers off of the reported earnings that they have received from various companies that have reported on you such as your 1099 and your W-2. They're looking for errors. They're looking for misstatements. And the software compares and analyzes all of this and at the end of the process spits out certain individuals to be audited.
Greg Thompson:
We've talked about how that process happens. Let's talk a little bit about how you're notified about an audit. And as we talk about that I wanted to also have you address, there are folks out there who are scamming. I know that I've gotten robocalls that have gone to voicemail that and said this is the IRS and you know it's not, but how are folks notified and can you talk about the scams that are out there?
Colton Lawrence:
Scams are definitely a very prevalent situation out there right now. And the one thing individuals need to know is that the IRS will never call you on your telephone to tell you that you have a liability due or that you are being audited or that you need to pay some amount by a certain date or your assets are going to be seized. That's just not the way they work. If you are audited or frankly for any other communication from the IRS, you're going to receive a letter in the mail. It's going to be on IRS letterhead. It will have a very distinct format to it. Will have very distinct titles to the letters that you receive and when you get those letters in the mail, the first thing you should do is contact Trucker CFO and we can help you understand what that letter means and exactly what you need to do with it. But again you will never be called on the telephone. You will never receive an email from the IRS letting you know of these situations.
Greg Thompson:
So those robo calls that I've been getting are obviously scams and I can tell right away because it's a voice generated thing. But some people might not know. Some of these scams are more high end and they can cause a lot of pain for people.
Colton Lawrence:
Absolutely can cause a lot of pain and they get more and more sophisticated and see more and more legitimate. The best way for people to avoid those situations is to just know, again the IRS will not contact you in those methods.
Greg Thompson:
Well Colton, I'm glad you talked about the official nature of the letter that folks will receive because when you receive that letter and you look at it and it checks out. Anytime you get a letter from the IRS, there is an immediate sense of concern. You look at the letterhead and then you start reading it and then you notice that you're audited and you mentioned something that is very important and that is to be able to reach out to a tax professional. Reach out to Trucker CFO because you guys are not just tax professionals, your tax professionals who understand trucking and you've walked with people through this process. You understand it intimately and you have great empathy for people who are going through this as well.
Colton Lawrence:
Absolutely Greg. This is one of the key services that we offer. We help truckers through audits all the time. And through that process we are able to represent them and get them the best outcome possible. We make sure all their ducks are in a row and we can remove much of the stress associated with going through an audit. I compare being audited to that of being sued. When you're sued, you're going to receive the paperwork from a Justice of the Peace. You're going to open that paperwork up. You're going to have the stress associated with being sued. And one of the first things you are probably going to do is contact a lawyer. The lawyer is going to understand the law. He's going to understand how to best situate you within that lawsuit to prevent you from having to pay out any more money than necessary. The same thing goes with an audit. In the case of an audit, the IRS is not your friend. They're gonna be coming after you. They're gonna be asking you to provide a whole bunch of documentation. Folks that are leading that audit for the IRS, it is their job to find errors. That's what they are supposed to do. Their jobs depend on it. And so they will be doing everything they can to collect additional tax from you. To assign additional penalties and interest on you. And that is how they justify their existence. So when you go through an audit you need somebody on your side to help you combat those IRS agents and what they're trying to do to you.
Greg Thompson:
And Colton, I know in talking with you that you really understand this and you have great empathy for this situation because you've been through an audit yourself. Can you share a little bit about that with our listeners?
Colton Lawrence:
Yeah Greg, back in 2006, I was just coming out of school. I was doing some side work in the construction industry as an independent contractor laying some concrete. In that year, I had gross receipts that were significantly higher than what I had shown in previous years and I was flagged for an audit. When I got that letter from the IRS, my immediate reaction was oh boy do I have everything in line? Are my ducks in a row? I intimately understand the stresses of going through an audit and I'm trained to represent people to go through audits. So I get what people are going through. I know what they are feeling and the folks here at Trucker CFO understand that as well and we can help you through this process and help minimize the stresses associated with going through an audit.
Greg Thompson:
Colton thanks so much for sharing your personal experience with audits. As I hear that, that really gives me a sense and gives our audience a sense that you guys truly understand this and understand the entire impact of the situation. As we move forward with our podcast here, I wanted to talk a little bit more about those circumstances that trigger an audit for owner-operators and independent contractors. And the first one is pretty obvious to anyone out there and that would be failing to report income. Can you talk about that a little bit?
Colton Lawrence:
What some people may not understand is that your 1099s, your W-2s, other forms such as those that you received from companies you have done work for. There is a corresponding copy of that form that is sent to the IRS. So the IRS knows how much money you are making and they are able to compare that information to what you report on your tax return. So for example, if you submit your tax return and you include one out of two 1099s that you have received, the IRS is automatically going to flag your tax return and is going to send you a letter, probably a letter called a CP-2000, asking you to correct the discrepancies that they see. That in and of itself is going to be a flag for audit. Additionally. and speaking about one of the common mistakes that we mentioned on our prior podcast, some independent contractors, especially those that are new to this process will submit a tax return with their W-2 income thinking that they're 1099 or business income goes on a separate tax return. And that also will be a flag for audit because in that situation they are not reporting all of the income on the correct tax return that the IRS is aware of.
Announcer:
You're listening to The Trucker CFO Podcast on PodWheels. In a moment, we'll get you back to our discussion with The Trucker CFO Colton Lawrence. Right now, we'd like to take a moment to talk to you about Trucker CFO. Through its many years of service and working with owner-operators and independent contractors, Trucker CFO has become a trusted resource and a leader in the trucking industry for providing tax, accounting, and business advisory for professional drivers. In today's world, it's crucial to have a trusted resource at your side that has the ability to stay on top of the ever changing conditions within the trucking industry and within our nation's economy. Now, more than ever before, you need a team of tax, accounting, and business advisory professionals who understand the complexities of the trucking industry. The Trucker CFO team is ready to go to work for you. There's a number of ways you can contact the team at Trucker CFO. We invite you to visit the company's website at TruckerCFO.com. From the home page, you can fill out the get started form which will send an email to a Trucker CFO representative. If you would rather email Trucker CFO directly, you can reach out to the company through the following address, info@truckercfo.com. That's info@truckercfo.com. You can also call Trucker CFO toll free at 1-800-533-4230 and hit option two for sales. That toll free number once again Is 1-800-533-4230 and choose option two.
At Trucker CFO, we understand the importance of being able to go from the white lines of the highway to the bottom line of your business.
Now as rejoin The Trucker CFO Podcast, here's PodWheels Executive Producer Greg Thompson and The Trucker CFO Colton Lawrence.
Greg Thompson:
Hello again everybody and thanks for making The Trucker CFO Podcast part of your day. I'm Greg Thompson from PodWheels Network joined once again by The Trucker CFO Colton Lawrence. Well Colton, as we move down our list here of triggers for an audit. I know you talked a little bit earlier about Scheduled Cs, but there's a little bit more particularly on the loss side related to Schedule Cs, can you talk to us about that?
Colton Lawrence:
Just like the IRS will look at your gross receipts as a trigger for an audit, they will also look at your net income as a trigger for an audit. So if you're continually reporting losses on your business income, the IRS is going to ask, how is it that this business is able to continue if they're never making any money? That's a very legitimate question. The way the IRS looks at this is if you have three years of continued losses, that third year will result in an audit flag and your audit risk will increase substantially on that third year.
Greg Thompson:
When I hear what you're talking about on this particular point. And then I think back to the formation of my LLC about four years ago where I went from being a W-2 employee to running my own business, you have a mindset when you're a W-2 employee that you want to get money back on your taxes. Everybody's looking for that tax refund. And when you go into business, one of the things that you've got to realize is that there are taxes that you have to pay. We talked about them in previous podcasts, there are self employment tax, there's quarterly estimated taxes. That's doing your business the right way. And you mentioned something in your response to this about folks that are coming to you and go, well, I had a previous preparer who told me I didn't have to pay taxes what we're doing and part of it is that adjustment from being somebody that's a W-2 employee, maybe a company driver coming into this. There are realities to running your business and paying taxes as part of that. And there are ways to manage your tax burden, but you gotta pay them.
Colton Lawrence:
You definitely have to pay them, right? As the saying goes, there are two things certain in life and that's death and taxes. The IRS expects that if you are in business, you are running that business to make a profit. If you're not in business to make a profit, they're going to reclassify you to a hobby. That in and of itself is a whole nother podcast that we could discuss. But when it comes to audit risk, if you're not making money, you in the IRS’s eyes are not running a business operation. So you need to be working for and trying to generate a profit in your business. And when you have a profit in your business, you're going to pay taxes.
Greg Thompson:
Well again, what we're really talking about here is business planning. And paying taxes needs to be part of your business plan because if paying taxes is not part of that business plan, you are most likely going to be facing an audit. At the same time in running a business, we all know that there are deductions and let's talk a little bit about that because there are legitimate deductions. There are deductions that are in a gray area, and then there's deductions that are going to be a flag for the IRS.
Colton Lawrence:
The way the IRS looks at expenses is by asking if it is ordinary and necessary to the business. And so what maybe a deductible expense for you in trucking would not be a deductible expense for somebody in a different industry.
Greg Thompson:
Sure. And that makes perfect sense. And that moves us on to about the home office deduction because for some that's going to make sense. For others if you are a single owner-operator and you're out on the road for 300 days a year or more and you have a home office, that potentially could be a flag. Can you talk to us about that?
Colton Lawrence:
At the home office deduction is one of those deductions that is definitely allowed based under the tax code. You are fully within your rights to take the home office deduction. But the standards for qualifying for that home office deduction are very very high. You have to use that home office 100% of the time for the use of your business. It cannot be mingled with personal type activities. So if you go into your office to pay personal bills. If you go in there to surf the internet, if you are storing personal items in that office, your deduction for your home office will be disallowed upon audit.
Greg Thompson:
And again it depends on the type of operation you have. If you're a fleet owner and you're there in that office the majority of the time, the home office deduction will most likely fly. Again, everybody's situation is different. Going back to our example, if you're a single owner-operator, you're out there 300 days a year. And as you said, your co-mingling activities in what you say is your home office, that could be a problem.
Colton Lawrence:
That's right. The IRS says that the home office has to be used exclusively and regularly for your trade or business. And as you mentioned, if a truck driver is out on the road for 320 days, it is a pretty high bar to say that they are using that home office exclusively and regularly within their business. But if they are a fleet owner and they are in that office every single day helping with dispatch and doing different things, they are more likely to legitimately qualify for the home office deduction.
Greg Thompson:
Another place that I found interesting is as we're looking through this, that's a flag, is nice round numbers. Because we know that expenses don't come out to the even dollar. And that's one of those things that I know as you guys are getting information on expenses from owner-operators, that is one of those areas that you immediately say, hey, we need the actual numbers.
Colton Lawrence:
That's correct. When we send out our tax organizer each year to our clients, there's a section in there where they can add additional expenses that may not have been previously reported to Trucker CFO. And many times when we get those back we will see our clients write in numbers such as $100 or $500 or $250. They're nice round even numbers. That process will flag you for audit because the IRS recognizes that those types of numbers are not common and as a result they will increase your audit risk. So the best practices is to make sure you keep receipts, and that you report those expenses in the amount that is actually on the receipt and let your accountant and us at Trucker CFO handle those expenses and do the bookkeeping in the proper way so that you minimize your audit risk.
Greg Thompson:
Colton, the last item on our list is one that as I was looking at this really surprised me but at the same time I'm glad it's there because as we move forward into this digital age we've got folks that are involved in cryptocurrency. That's become a new area. That is a trigger for the IRS.
Colton Lawrence:
Greg, it's actually a new question on the tax return beginning in 2019 that the tax preparer is supposed to ask the taxpayer. And that is, did they buy or sell cryptocurrency during the tax year? What this means is the IRS is looking more heavily at purchases and sales of cryptocurrency. And because of that it is definitely an audit risk. The IRS has really struggled over the past several years as cryptocurrency has made its way into the mainstream and because of this, if you have bought or sold cryptocurrency you're going to be at an increased risk for audit. We are seeing this more and more as apps such as Robin Hood and other ways of purchasing stocks and cryptocurrency become easier and easier for truck drivers. They are becoming a bigger and bigger part of tax returns. And so if this is your situation, you definitely need to talk with Trucker CFO so that we can best consult you on those transactions and make sure you're doing everything you can to minimize your audit risk and correctly report your gains and losses on those types of transactions.
Greg Thompson:
Colton as we look back at this list of triggers and considerations for audit. As a business owner myself, I feel a bit better about what I'm doing. How I'm approaching things because I feel like I'm on point because I have created a plan. I know you as a business owner and having gone through an audit yourself, you have a plan that keeps you on point. And I think that as we walk with owner-operators and small trucking business owners and independent contractors through this, the thought is that having a plan, being prepared, doing things the right way, and having professionals at your side is so key. It takes a lot of the stress. I'm not saying it's going to take all the stress out of it. I mean you're being audited. Let's be real about it. It's one of those things that's very uncomfortable. As I said it's like that moment in the medical examination like do we really have to do this? And the doctor says yes we do and you got to do it. And it's the same thing with the IRS. But as I look back at this, I feel like we've shared what can happen, how to handle it, and the importance of having professionals like your team and Trucker CFO by your side.
Colton Lawrence:
That's right Greg. And for those that have listened to our podcast series, they will know that there is a definite theme that has emerged and that is the importance of planning and having a strategy in place for running your business, for minimizing your tax liability, and for doing things the right way. And this definitely applies to minimizing your audit risk. But in the event that a truck driver is audited, the very first call that they should make is to Trucker CFO because we do this on a regular basis. We can represent them and we can ensure the best outcome from that audit and make sure they are minimizing the additional amount of tax and penalties and interest that might come otherwise from that audit.
Greg Thompson:
And the way that you guys approach it is that if you're working with somebody on a return, correct? You're going to walk with them through the entire process.
Colton Lawrence:
That's right. We can walk them through the entire process. We can handle the communication between the clients and the IRS agent that is running that audit. For the most part, we can pretty much take the client out of the process by signing a limited power of attorney that will allow us to act on behalf of the client in working with the IRS. And as you said, that will remove a large chunk of the stress associated with going through this process.
Announcer:
That’s Colton Lawrence, The Trucker CFO. Everyone at PodWheels would like to thank you for listening to The Trucker CFO Podcast. As we noted in the opening of the podcast, please keep in mind that every tax situation is unique and the perspective shared on this podcast should not be considered as tax advice. If you have questions regarding your specific tax situation, you should consult a qualified tax professional.
Now before we close out the podcast, we'd like to talk to you about Trucker CFO. Do you have a team of tax, accounting, and business advisory professionals who understand the complexities of the trucking industry? There's a number of ways you can contact the team at Trucker CFO. Visit the company's website at TruckerCFO.com. From the homepage you can fill out the get started form which will send an email to a Trucker CFO representative. If you would rather email Trucker CFO directly, you can reach out to the company through the following address info@truckercfo.com. That's info@truckercfo.com. You can also call Trucker CFO toll free at 1-800-533-4230 and hit option two for sales. The toll free number once again 1-800-533-4230 and choose option two.
Once again thanks for connecting with us on PodWheels. You can stay up to date on the latest from PodWheels by downloading the PodWheels app. It's available in the Apple Store and on Google Play. Just search PodWheels in either store and download the app. Be on the lookout for the next edition of The Trucker CFO Podcast right here on PodWheelsk.
As always, Trucker CFO and PodWheels, send our best for your safe travels out on our nation's highways. And finally, we would also like to remind you that in addition to staying safe, you take the necessary steps to also stay healthy, as you do the critical work of keeping the American supply chain moving.