IRS Auditing More Fleets for Inadequate Personal Use Recordkeeping
“There will always be employees who are meticulous in their recordkeeping and others who are not. What’s important is having a policy that protects the company in case of inadequate reporting,” said Susan Stiles, manager of customer services for PHH Arval, a fleet management company in Sparks, Md.
Non-Compliance with Personal Use Reporting
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 that 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 implement 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. “Not all employees can itemize their taxes, especially younger employees straight out of school,” said Stiles.
Employees Who Work at Home
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,” said Stiles. The IRS says that commuting to work is not business use, it is personal use. “Some companies feel that employees working from a home office are on a business trip anytime they leave their homes. But that’s not how it is defined in IRS regulations,” said Stiles. 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. “If an employee’s first trip is to a client, let’s say for illustration’s sake, 180 miles away, a simple remedy to avoid 180 personal miles is to have a reason to make the first stop of the day to a nearby Kinko’s, for example. Thereafter, all miles driven are business miles,” said Stiles.
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 you might not be able to find that person,” said Stiles. Likewise, when an employee voluntarily departs the company, don’t wait until year’s end to calculate and withhold taxes for personal use. “It’s easier to do withholding on the employee’s last paycheck,” said Stiles. 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.
Employees Who Claim No Personal Use
Sometimes employees report no personal use, insisting the company vehicle is used for business only and all personal use is with their private car. “If an employee wants to opt out of personal use with that explanation, I would have them sign an affidavit and obtain the year, make, and VIN of the alternative vehicle they use for transportation,” said Stiles. “I would also require that they drive their personal vehicle to the office to pick up the company car every day. At the end of the workday, they would be required to return the company car and drive their personal car home.”
An Expensive Headache
Managing personal use is a headache. It is also expensive, with internal costs ranging from $32 to $70 a 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.