The IRS has a long history of going after truck drivers. There are a number of reasons for this, but, largely it is because of the nature of the expenses that truckers incur.
Most truck drivers are small business owners, as they own and operate their own rigs. These small businesses travel, so their expenses are travel expenses. Our tax laws provide for more nuanced rules and substantiation requirements for travel expenses.
The IRS may be reasonable in some cases, but when it comes to travel expenses, the IRS often is not reasonable. The Clark v. Commissioner, T.C. Memo. 2007-172, case provides an opportunity to consider a case where the IRS denied a trucker’s tax deductions for records that were destroyed in a fire.
Facts & Procedural History
Mr. Clark was a truck driver. He was employed by Jimmy Harris Trucking, Inc., Vandy Trucking, Inc., and Peters Hauling, Inc. Mr. Clark failed to file income tax returns for 2001 or 2002. The IRS conducted an audit of the trucker’s 2001 and 2002 tax returns.
Mr. Clark did not submit evidence of deductions and exemptions as his records were lost during a fire at his father’s residence in 2005. The IRS agent asserted that Mr. Clark made no attempt to reconstruct records or obtain corroboration of his claims.
The Failure to Cooperate
The court provides this summary of the interaction between Mr. Clark and the IRS attorney:
The parties in this case failed to stipulate or otherwise to provide a satisfactory record. Petitioner was poorly advised, apparently by a person not admitted to practice before the Tax Court. Petitioner did not cooperate with respondent in preparing the case for trial, which led to excessive reactions by respondent, including excessive interrogatories and motions. Respondent’s interrogatories contained eight pages of “definitions” and “instructions” and were, in effect, directions to require petitioner to lay out his case in writing rather than simple questions such as those anticipated by Rule 71. See Pleier v. Commissioner , 92 T.C. 499 (1989). Such interrogatories are particularly inappropriate against a pro se petitioner and were unnecessary in this case because petitioner’s compliance with other Rules and the standing pretrial order would have supplied the information that respondent needed. Moreover, the interrogatories apparently motivated petitioner to give evasive answers to respondent’s poorly phrased requests for admissions and to refuse to admit to the items of income identified in the statutory notice and in the requests for admissions. Thus, respondent’s motions to compel answers to interrogatories and to review the sufficiency of the responses to the requests for admissions were denied.
This is a scathing narrative for both the taxpayer and the IRS attorney. The court apparently even gave the taxpayer additional time to provide records and to reconstruct his records by making estimates.
The Cohan rule or Cohan doctrine is a legal principle that allows a taxpayer to estimate their expenses when they are unable to provide actual records or receipts to support their deductions on their tax return. The rule is based on a court case, Cohan v. Commissioner, where the court allowed the taxpayer to estimate his business expenses when he could not provide sufficient records.
Under the Cohan rule, if a taxpayer can provide some evidence to support their estimated expenses, the court may allow a deduction even if the amount is not precisely substantiated. However, the estimate must be reasonable and based on some factual basis, and the taxpayer must prove that the expenses were actually incurred.
The Cohan rule has been applied in cases involving various types of expenses, including travel and entertainment, business expenses, and charitable contributions. However, it is important to note that the rule is not a blanket permission to estimate any deduction, and the taxpayer must still provide some reasonable evidence to support the estimate.
The Cohan rule is frequently applied in tax court cases, where taxpayers may not have complete records to support their deductions. However, the IRS may challenge the estimate and require the taxpayer to provide more evidence or substantiation, as it did in the current case.
The court noted that the taxpayer “belatedly claimed that documents were not within his control because they were destroyed in a fire.” Given this absence of records, the court concluded that the expenses were not substantiated and denied the taxpayer’s deductions.
Per Diem Amounts
The per diem amounts may also help in estimating expenses for truckers. Per diem is intended to cover the costs of meals, lodging, and incidental expenses that a truck driver incurs while on the road.
Our tax laws allow truckers to deduct a per diem allowance for these expenses, which can help reduce their tax liability. Naturally, there are specific rules and limitations that must be followed in order to claim per diem deductions. For example, the per diem rate must be reasonable, and the driver must be away from their tax home overnight. The driver must also be able to substantiate their per diem expenses with accurate records and documentation.
The rules provide two methods for claiming per diem deductions: the standard meal allowance method and the actual expense method. The standard meal allowance method provides a set amount per day for meals and incidental expenses, while the actual expense method allows drivers to deduct the actual cost of their meals and incidental expenses.
Like the IRS, the tax court often does not give the taxpayer the benefit of the doubt when it comes to expenses. This is why truckers should consider setting up their recordkeeping system.
Truck drivers, like any other taxpayer, should establish a good recordkeeping system to ensure that they have the necessary records and documentation to support their deductions. The envelope system is one way to do this. This system involves labeling and organizing receipts by category and storing them in envelopes. The envelopes can then be used to calculate and substantiate deductions when tax time comes around.
Another useful strategy is to separate business expenses from personal expenses by using a separate checking and credit card account for business transactions. This can help simplify recordkeeping and make it easier to track business expenses and deductions.
In addition to these strategies, there are many other recordkeeping systems and software available that can help truck drivers and other taxpayers keep accurate records and documentation. It is important to choose a system that works well for your particular needs and to make sure that you are consistently keeping up with your recordkeeping throughout the year. By doing so, you can help ensure that you have the necessary records and documentation to substantiate your deductions and avoid any issues with the IRS or tax court.
It is easy for a case to go sideways with the IRS. This can happen if the IRS employee is unreasonable or if there is simply a personality conflict. These things happen. The result is usually not favorable for taxpayers as taxpayers have the burden for most items that are litigated in the tax court. The court seems to offer a middle ground in this case, but the taxpayer did not take full advantage of it. An attempt to reconstruct records probably could have resulted in a different outcome.