IRS Says Fleets Face Sanctions

By Jonathan S. Reiskin, Associate News Editor

This story appears in the April 16 print edition of Transport Topics. Click here to subscribe today.
ORLANDO, Fla. — Internal Revenue Service officials told trucking industry financial executives that motor carriers must account properly for driver per-diem expenses or risk losing the tax-exempt status of the plans.
Robert Everitt, IRS chief technical adviser for the trucking industry, said carriers that pay drivers by the mile often make per-diem payments in excess of the $52-a-day maximum the service allows. Any amount over that limit, he said, must either be refunded by the driver to the company or be reclassified as taxable wages.
Currently, the $52 per diems are considered nontaxable reimbursement, rather than taxable income, and are used to cover meals and incidental expenses.
“Under the terms of a qualified plan, there’s supposed to be a return of excess, but I’ve never seen one company do it in 35 years at this job. You have to turn the excess amount into wages or get the money back,” Everitt told members of the American Trucking Associations National Accounting & Finance Council here April 5.
Janine Cook, an IRS attorney, said the cap-and-refund requirement “has been in the rules since 1989.” However, she said, because compliance with the rule was a rarity, “something had to be done to kick up the ante.”
Cook said that if a carrier makes no attempt to comply with the rule, the IRS has the authority to deem all of the per-diem reimbursement as taxable wages that are subject to withholding.
Some carrier executives balked at the difficulty of the accounting chore being placed before them.
“This will be humongously labor-intensive,” Lynette Brown, chief financial officer of KKW Trucking in Pomona, Calif., told Everitt.
In an interview after the session, Brown said she would like the IRS to provide a cents-per-mile per-diem rate that carriers could use without challenge.
“If they came up with a rate that would be accepted with no questions asked, I’ll bet they’d get 100% compliance from the industry,” Brown said.
While many carriers try to calculate such a rate based on fleet averages for weekly miles per driver, Everitt and Cook said the problem is that tax authorities are concerned with each individual taxpayer’s obligations, not industry averages.
Under an example prepared by Everitt, a carrier’s busiest drivers will tend to rack up unlawful amounts of per-diem payments. Drivers with below-average mileage will pull in less than $52 a day, but the IRS does not care about that, Everitt said.
Everitt said that when auditing a trucking company, he will establish a three-part test: 
• Is the driver at work when he or she gets credit for a per-diem payment? 
• Is the driver away from his or her tax home, as local drivers are not eligible for tax-free per diems? 
• Is there a return of excess for payments beyond $52 a day?
Everitt said it would be easiest for him if he and other auditors could review driver logs to address the first two questions, and have the carriers pay a flat rate of $52 a day rather than cents per mile.
However, Paul Will, CFO of Celadon Group and NAFC’s chairman, said that would not be a tenable solution. He said most carriers do not keep driver logs beyond six months, as the Federal Motor Carrier Safety Administration does not require them to do so.
As to the notion of per-mile wages and a flat-rate per-diem, he was not eager to endorse it.
“Truckload carriers usually pay per mile. A split system would be tough. It’s not unrealistic, but it is burdensome,” Will said, adding that NAFC has worked with Everitt before on creating workable tax procedures for the industry and may do so again on this issue.
A financial executive with a major truckload carrier told how his company addresses the problem, but did not want to be identified for fear of inspiring an IRS audit.
He said “Carrier X” pays its drivers 38 cents a mile in wages and per-diem combined. Each day, a driver starts his work by answering a question about location on his or her in-cab communications system, which is equipped with a Global Positioning System feature.
That query establishes whether the driver is working away from home for that day.
At the end of the week, the company adds up miles driven for each driver. That gets multiplied by 38 cents a mile and generates total compensation.
If the driver is eligible for per diem, the company subtracts $52 a day, the legal maximum. Whatever is left over is considered taxable wage income.
Everitt said he worked with one fleet to create trip reports that incorporate geofencing technology to establish when a driver is away from home. He also said the definition of “home” can vary. It could either be a driver’s home terminal or his actual residence, if he or she keeps a truck there.