So You Owe the IRS…

What’s an owner-operator’s least favorite cost of all?

Writing a check to the Internal Revenue Service (IRS). At least when you shell out several grand for a transmission overhaul you see a tangible benefit!

Let’s say you’ve filed your returns, but you didn’t have the $8,000-10,000 sitting in the bank to send them a check for taxes owed.

What now? Will you be audited? What about late fees? How is this going to impact your owner-operator business?

You may be surprised to learn that there is nothing illegal in owing money to the IRS – even if you’ve owed taxes for several years. However, it is illegal to go more than three years without filing. As a matter of fact, the IRS can charge you with a felony known as Failure to File. In the interest of full disclosure, more often than not, the IRS would prefer that you simply file your returns and begin at least putting a dent in your tax bill.

What happens sometimes is the IRS prepares what they refer to as “substitute” returns. They tax your gross income, at the highest possible rate, and without any deductions. They can legally pursue this liability against you just as if you had filed the return yourself.

We occasionally hear from drivers who haven’t filed their taxes in years, but they are getting sky-high bills from the IRS for taxes they couldn’t possibly owe. What most people don’t realize, and the IRS may not tell you, is that even if the IRS has filed one or more of these substitute returns against you, you still have a right to go back and pursue an over-turn of the substitute return by filing your actual returns (based upon what you actually put into your pocket after all your business deductions).

As to be expected, there is a special appeal process to request this relief from the IRS. If you have your actual returns prepared and send them to the IRS through the regular channels, they will go directly into the trash. Rather, if you received a bill from the IRS when you haven’t filed your taxes for three or more years, contact a tax firm that specializes in working with the IRS (if they understand taxes in trucking and for owner-operators, that’s even better).

Should you amend more than three years?

Most taxpayers (and even many tax attorneys and CPAs) believe that you can only amend tax returns for a maximum of three years. The Internal Revenue Code has a little-known provision that actually allows you to amend any return for which there is still a balance owed to the IRS. Once that balance is paid, the clock starts ticking on the 3-year statute for amending.

 What difference does it make to incorporate?

Incorporating your trucking business, even if you are just one person, can often be a big step toward legally cutting your income taxes. It is also one of the things that pays for itself immediately. Incorporating can help in three different ways:

1. You may be able to deduct more expenses. There are additional expenses a corporation is allowed to deduct that may not be allowed to a sole proprietorship. For example, life insurance and other types of insurance for officers and other employees (various fringe benefits and allowances). One thing to know, you are required by law to hold a meeting of shareholders even if you are the sole shareholder. All of the expenses for travel and accommodations (if applicable) to hold the shareholder meeting are fully deductible if held in the 48 contiguous states.
2. You may save in Social Security Taxes. You have the prerogative (within reason and particularly with a Subchapter S. Corporation), to not tax all income for Social Security Tax purposes. How does this work? Let’s use a a fairly common example. Let’s say you gross $150,000, and after all of your expenses, you net $50,000. Your Social Security, or Self-employment Tax on that net of $50,000 is $6,450. However, with an S-Corporation, you are able to make the election for only half of your compensation ($25,000 in this instance) to be subject to Self-employment Tax. In this example, you’d cut your tax bill by $3,225. There are owner-operators that choose to pay Self-Employment Tax on an even lower portion of their income which is the taxpayer’s choice, but choosing to pay on half (50%) of the income is a safe level for IRS purposes.
3. It may reduce your risk of an audit. Many owner-operators incorporate for this reason alone. According to the IRS’s own statistics, for a business with a gross income of $10 million or less, incorporating reduces the likelihood of a tax audit by over 50%. No one single move by a business can reduce your chances of an IRS examination as much as incorporating.

Is incorporating for everyone? Probably not. If you are a brand new business or your gross income is less than $20,000, you may want to wait for the time being.

When it comes to taxes and the IRS, use a Certified Public Accountant or attorney that specializes in owner-operator taxes for trucking businesses and specializes in working with the IRS.

Visit eTruckerTax.com for more tax help.

Author and CPA E. Dennis Bridges is the Executive Director of eTruckerTax. His books include On Level Ground with the IRS and The Truckers Tax Relief Toolkit. Contact eTruckerTax at [email protected] or eTruckerTax.com.