Don't Get Cute!
Novel tax defenses won't work with the Internal Revenue Service. The law allows as a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. This include expenses for traveling while away from home[i]. Since the average OTR truck driver is away from home 250 nights a year and accumulates hundreds of receipts, it is tempting to inflate tax deductible travel and business expenses to minimize taxes.
IRS Taxpayer Advocate Service , "Most Litigated IRS Issues of 2022"
For FY2022 the Tax Court imposed $9,070,664 in frivolous issues penalties on 457 taxpayers.
Billy was a self-employed truck driver subject to DOT hours of service regulations who was entitled to claim meals per diem and other business expenses as a tax deduction[ii]. However, for the tax year under audit he also claimed hometown meals and provided the IRS with a novel defense.
U.S. Tax Court inquiry[iii]:
Billy's novel defense:
With respect to the hometown meals, Billy provided receipts to show that he paid $1,765.34 for restaurant meals in between work assignments[iv].
He contended that although his employers did not require the meals, the meals had a business purpose
They gave him an opportunity to meet with other drivers to gain their wisdom as to how best to advance his driving skills, e.g., learning safety tips, the rules for hours worked, and how to increase his earnings
Billy wrote on the backs of the receipts the first but not last names of the person(s) with whom he ate.
He did not record or clearly state the business purpose of the meals.
Included in the total were payments of $225 and $200 to purchase meals for several other drivers as appreciation for their advice.
Billy also claimed business expenses for his home office, but provided receipts that only showed a dollar amount and cryptic descriptions:
Luggage RO EAC Driver
Most expenses were personal Nike sneakers
Was the US Tax Court persuaded?
No. The novel tax defenses did not persuade the U.S. Tax Court:
Trucker was not entitled to $1,765 for hometown meals, and
Only half or $1,164 of business expenses.
As this case demonstrates novel theories for tax deductible items will not survive scrutiny in a tax audit. The unique nature of the trucking industry compels drivers to exercise due diligence when assembling tax records and reviewing the tax return lest you end up like Billy.
About the author
Mark W. Sullivan, EA founded Sullivan Consulting in 1998. He specializes in federal tax controversy representation, appeals and consulting on behalf of individuals, businesses, law, and accounting firms nationwide. In addition, he has served as the consulting and expert witness in numerous civil and criminal cases in multiple federal district courts.
Mark has an unlimited Enrolled Agents license and is admitted to practice before the Internal Revenue Service based on his extensive experience as a Revenue Officer in New York, NY, St. Louis, MO and Washington, D.C..
Copyright 2022 Mark Sullivan Consulting, PLLC. Per Diem Plus proprietary software is the trademark of Per Diem Plus, LLC.®
Disclaimer: This article is for information purposes only and cannot be cited as precedent or relied upon in a tax dispute before the IRS.
[i] IRC Section 162 (a)(2)
[ii] IRS Rev. Proc. 2011-47 (most recently superseded by 2017-42) & IRC 162(a)(2); Reg 1.162(2) A tax deduction is allowed for ordinary and necessary traveling expenses incurred by a taxpayer while away from home in the conduct of a trade or business.
[iii] Excerpted from HATEM ELSAYED, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 8935-07S. Filed May 26, 2009
[iv] Under IRC 274(d) no deduction shall be allowed for travel expenses unless the taxpayer is away from home and substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement
(A) the amount of such expense or other item,
(B) the time and place of the travel
(C) the business purpose of the expense, and
(D) the business relationship to the taxpayer of the person receiving the benefit.