Last August, the IRS announced areas it will prioritize for audits in 2014, one of which is fringe benefits, especially the personal use of company vehicles. The priority areas identified by the IRS are based on the recent completion of a national research project on employment tax compliance. “Early findings from these audits indicate that employers are not reporting employees’ personal use of company vehicles on Forms 1099 or W-2,” according to New Rivers Innovation, a team of tax experts, that issued the alert. The company added: “Look for the IRS to investigate the use of all company cars, especially luxury autos in its audits.”
Understandably, fleets managers do not want to publicize past audits of personal-use compliance, but they are occurring at increasing frequency. For example:
- A major fast food company recently underwent its second audit in four years.
- A recognizable consumer goods company “dodged a bullet” due to a technicality and willingness to fix the problem. It was facing a major fine, interest, and back taxes.
- The fleet of a large food products company was recently audited, but did not disclose details of the audit results.
This is an issue that fleet managers know is a problem, they just don’t know how to address it. Ask yourself: Are your drivers are keeping IRS-compliant mileage logs?
Most companies maintain a checklist to monitor driver submission of personal-use reports. If a driver fails to submit a report, a monthly notice is sent as a reminder and copied to the employee’s supervisor; however, this alone is not always successful. Every fleet manager has stories of drivers who simply can’t or won’t report personal-use mileage on a regular or timely basis. Some fleet managers have a policy if a driver doesn’t report mileage, the company calculates 100-percent of the annual lease value as personal use. It is a punitive measure, but some fleet managers who have implemented this practice say that once it is done, they never have a problem with that driver again. This practice protects the company by including the maximum taxable benefit on the employee’s W-2. Employees who have mileage records can still take a deduction for business-use mileage at a later time on their personal income taxes. However, some companies shy away from implementing such a fleet policy due to a perception that it is unfair to some employees who do not itemize their taxes
Another frequent problem with personal-use reporting occurs when a driver works out of his or her home. Often, employees working from home offices report very little personal miles, arguing that the majority of vehicle use is from their “office” to a customer, job site, or other business location. Personal use for employees who work from their homes is complicated because of the confusion over whether the first and last trip of the day is considered a business-use trip or personal use. The IRS regulations state that commuting to work is not business use, it is personal use. Some home office employees believe they are on a business trip anytime they leave their homes. But, that’s not how it is defined in IRS regulations. Unless a home is the “primary place of business,” the first trip of the day is going to work, not leaving work. For a typical sales rep, the primary place of business is really the client’s office. Therefore the first and last business trips are personal use.
Another area of caution is when spouses and licensed children are allowed to drive company-provided vehicles. You must ensure that miles driven by them are reported as personal miles.
Handling Mid-Year Terminations
When employees are terminated, immediately perform a reconciliation or true-up for personal use. Don’t wait until the end of the year to get a mileage report, when it may be difficult to find the former employee. Likewise, when an employee voluntarily departs the company, don’t wait until year’s end to calculate and withhold taxes for personal use, it is easier to do the withholding on the employee’s last paycheck. Your HR department, as part of the employee closeout process, should require the employee’s supervisor to perform a physical inspection of the vehicle, repossess the car keys, and notify the fleet department to cancel fuel and maintenance charge cards. In addition, HR should obtain a mileage statement on business and personal-use miles as of the last day of employment to calculate the taxable benefit for the final payroll adjustment.
An Expensive Headache
Managing personal-use compliance is a headache. It is also expensive, with internal costs ranging from $35 to $75 per year per vehicle; however, it all becomes worthwhile should your friendly IRS agent come knocking on your front door.
Let me know what you think.