Trucking & Taxes – May 2023
Problems with the Internal Revenue Service can happen.
Maybe you left off a 1099, W-2, or you were unlucky and selected for audit. Maybe you didn’t make estimated tax payments and now owe a great deal.
The trucking industry seems to have more than its fair share of taxpayers with IRS problems. But why is this the case? There are several factors that can lead truck drivers to have tax issues.
Not making estimated taxes
Many owner-operators start out as W-2 drivers, where taxes are taken from their paycheck. Then they enter the world of self-employment, and they are suddenly responsible for paying taxes and keeping track of income and expenses. Figuring out federal taxes, self-employment taxes, state taxes, and how much to set aside or pay into the IRS as estimated taxes can be overwhelming.
Taxes are considered pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year. The IRS requires individuals, including sole proprietors, partners, and S corporation shareholders to make estimated tax payments if they are expecting to owe tax of $1,000 or more when they file.
Estimated tax payments are due as follows:
- 1 – March 31 is due April 15.
- April 1 – May 31 is due June 15.
- June 1 – Aug. 31 is due Sept. 15.
- 1 – Dec. 31 is due Jan. 15 of the following year.
Note: If these due dates fall on a Saturday, Sunday or legal holiday, the payments are due the next business day.
This will help you avoid a surprise tax bill when you file your return. You can also avoid interest or a penalty for paying too little tax during the year. Ordinarily, you can avoid this penalty by paying at least 90% of your tax during the year.
Not filing taxes
Many truckers in their early years of business find they made money and now owe self-employment tax (15.3% of net income), plus federal income tax and state income tax. That can be an overwhelming amount of money you don’t have.
It’s possible that you could not file your taxes and not receive a letter from the IRS for two years. By that time, you haven’t filed for two years going into three. Now, the IRS does the return for you, and you owe $20,000 or $30,000 more than you would have if you filed on time.
The moral of the story is that it’s better to file a return and owe money than it is to just skip the return until the IRS takes the matter into its own hands.
IRS audit
If chosen for an IRS audit, truckers can run into problems when they don’t do bookkeeping and keep accurate records.
When going through an IRS audit, you need clean records that support your income and expenses. Otherwise, the IRS will deny the expenses they deem unsupported or adjust income up to a 1099 that may have been sent in on your taxpayer number.
When you keep track of business expenses, you can determine profits and losses and look at business trends to help you make forecasts. Since you know how much money you have and where your money goes, you can also plan for taxes and other responsible ways to use the funds. In addition, having good records helps you support the deductions you use for business expenses on your tax return in case of an audit.
The best way to determine profits and losses and to provide support for tax deductions is to do bookkeeping. Yes, it can be time-consuming. Services, such as TruckerTaxTools.com, can make the process easy and efficient.
But what if you didn’t prepare, and the IRS audit reveals that you owe money? What can you do then?
The IRS offers many solutions. Just remember that the purpose of the IRS is to collect all money due to the federal government.
- Pay in full. The first choice the IRS offers is a full-pay agreement. Of course, if you could have then you would have.
- Short-term payment plan. If you can’t pay in full immediately, you may qualify for additional time – up to 180 days – to pay in full. There’s no fee for this full payment. However, interest and any applicable penalties continue to accrue until your liability is paid in full.
- Streamlined installment agreement. There are two types of streamlined installment agreements, depending on how much you owe and for what type of tax. For both types, you must pay the debt in full within 72 months (six years), and within the time limit for the IRS to collect the tax. But you won’t need to submit a financial statement.
Generally, you’re eligible for a streamlined installment agreement if:
- Your assessed tax liability is $25,000 or less (for an individual, in business with income tax only, or an out-of-business taxpayer)
- Your assessed tax liability is $25,000 to $50,000 (for an individual or an out-of-business sole proprietorship) and you agree to pay by direct debit or payroll deduction.
Also, your proposed payment amount must fully pay the assessed tax liability within 72 months or satisfy the tax liability in full by the collection statute expiration date, whichever is less.
The IRS charges a user fee when you enter into a payment plan. However, if you are a low-income taxpayer, this user fee is reduced and possibly waived or reimbursed when certain conditions apply.
- Installment agreement. If you do not qualify for the streamlined installment agreements, you may still be eligible for an installment agreement. However, a notice of federal tax lien determination and a collection information statement will be required.
- Partial pay installation agreement. This is an installment agreement that will not be fully paid before the collection statute expiration date. If you propose this, you will be required to complete a financial statement and provide supporting financial information.
Also, a notice of federal tax lien determination is required. If a partial pay agreement is approved, it will be subject to future reviews to determine if your financial situation has changed. You may be required to provide a new financial statement and supporting financial information during this review. The financial information you provide may result in a reduction, an increase, or no change to your monthly installment agreement amount.
- Offer in compromise. This is an agreement between you and the IRS that resolves your tax liability by payment of an agreed-upon reduced amount. Before the IRS will consider this, you must have filed all tax returns, have received a bill for at least one tax debt included on the offer, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter and the two preceding quarters if you are a business owner with employees.
Basically, you must be in compliance with all taxes and filing requirements once the offer is submitted and stay in compliance while the offer is pending and for five years after the offer is accepted.
- Temporary delay in collections. If you can’t pay any of the amount due because payment would prevent you from meeting your basic living expenses, you can request a delay. If the IRS determines that you can’t pay any of your tax debt because of financial hardship, the IRS may temporarily delay collection by reporting your account as currently not collectible until your financial condition improves. Being currently not collectible does not mean the debt goes away. It means the IRS has determined you can’t afford to pay the debt at this time. The IRS will ask you to complete a collection information statement and provide proof of your financial status.
The IRS will continue to accrue penalties up to the maximum allowed by law and interest until the debt is paid in full. Yes, the IRS will review your ability to pay in the future, especially if they see your income go up on the tax returns you file. The IRS will usually suspend collection actions, such as issuing a levy until your financial condition improves. The IRS also will most likely file a notice of federal tax lien while your account is suspended.
Those are the options, but how do you decide which is the best one for you?
Consider all options and don’t fall for the commercials that basically promise the moon and the stars. Each option to resolve your IRS tax debt needs to be tailored to your financial situation. Although we have great success in getting an offer in compromise through the IRS, not everyone qualifies. Some items that get you disqualified could be home equity, too much income, 401(k) or other retirement savings, not enough qualified expenses and expenses you have that the IRS considers not necessary or outside their national standard.
We offer free consultations. Call us at 877-966-2477 for both IRS problems and your trucker bookkeeping and taxes.
Whatever your choice is to solve your IRS debt, I always say, “Never go at it alone vs. the IRS.”
Get representation. The IRS will say you don’t need it, but you do need a professional on your side. The tax code includes a Taxpayer Bill of Rights, which applies to all dealing with the IRS. There are 10 taxpayer rights, and none is more important than the right to retain representation. LL