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San Antonio Construction News • OCT 2019
Five IRS audit mistakes to avoid
Non-Owned Vehicle Risk Management
Steven Bankler, Owner San Antonio, TX
Mark Gaskamp, Sr. Vice President Marsh Wortham Austin, TX
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he IRS audits about one million taxpayers each year. While the agency is understaffed, that doesn’t mean you’ll slip through the cracks. IRS software automates the selection process now by flagging returns that show abnormalities: Perhaps the return deviates from what’s normally filed, or it’s been linked to a family member, investor, or business partner who is being audited. Also, the more money you make, the more likely you are to be audited. An audit may consist of a simple letter from the IRS or, when the stakes are higher, you may need to meet with an auditor in person. In either case, common mistakes can almost guarantee you don’t come out on top. They include: 1. Ignoring IRS requests and deadlines Failure to respond to IRS requests for information won’t stop the agency from taking action. The IRS has the power to request your tax information directly from financial institutions (banks, brokerage houses, credit card companies, etc.). If it’s an audit of a personal return, they could contact your employer. If it’s an audit of a business, they could contact both customers and vendors. All of these powers arise when the taxpayer (or authorized representative) fails to communicate or respond to the IRS’s Information Document Request (IDR). If the audit proceeds without your cooperation, the IRS can and will issue a Revenue Agent’s Report (RAR) and finally a Statutory Notice of Deficiency. Generally, you will have 90 days to file a court petition to The US tax Court. Again, failure to respond to this notice can cause the taxpayer to forfeit appeal rights. The IRS then begins collection procedures, which can include filing federal tax liens, wage garnishments, and levies. In Texas, we have a “homestead” protection - ordinary creditors cannot seize and sell your homestead. However, the IRS is no ordinary creditor. They HAVE the POWER to seize and sell your residence to pay your tax debts. Missing an IRS audit appointment could start you down this path. 2. Not filing past-due returns One of the first steps in addressing an audit is to make sure you have filed all tax returns that are overdue. Don’t let the fact that you may not be able to pay the taxes affect the filing. Late filing penalties accrue at the rate of 5% per month, while late payment of the taxes incurs penalties of 0.5% per month plus interest. If you failed to file at any time in the past, the IRS can prepare and file those returns for you as a Substitute for Return (SFR). Those returns, however, will not include the deductions and credits you may be entitled to receive. The IRS will begin collecting the tax due shown on these returns (which may be inflated due to deductions and credits having been omitted). If these returns indicate you may be owed a refund, there is a limited amount of time that refunds will be returned to the taxpayer on late filed returns. You could also risk losing Social Security benefits as well as your ability to obtain home, business, or education loans.
3. Lying
verybody’s got one, some larger than others, some are not even owned, but they still create a risk for the organization. Construction operations have so many worker safety (OSHA) and liability issues (construction defect, mold, silica, etc… ) they often neglect addressing one of the greatest risks to the organization, vehicles and safe driving. In fact, motor vehicle accidents are the largest source of workplace fatalities in the work place. This includes not only the owned trucks and other vehicles owned by the company, but also the use of personal vehicles on company business.
The most common tax-related lies are underreporting income (usually income received in cash or received outside the U.S. as foreign income) and claiming false deductions, both of which can trigger heavy IRS penalties, fees, and interest. And then there’s tax evasion and tax fraud, which can be criminal offenses that could land you in prison. When an auditor uncovers a cardinal sin like substantially underreporting your income or failing to report foreign bank and financial accounts, you may be heading down a long, dark path that could cost you dearly.
A serious auto accident involving an employee driving on company business is one of the few exposures that can result in a first party, property damage claim, second party workers compensation claim, and a third party liability claim. Each can result in significant financial loss depending on the nature of the accident. It is such a critical workplace safety issue OSHA, in cooperation with the National Highway Traffic Safety Association, has dedicated resources to develop a guide & resources to help show the importance of fleet safety. https://www.osha.gov/ Publications/motor_vehicle_guide.html
4. Not contesting when there’s a good reason.
The most important component of any fleet safety program is defining who is allowed to drive on company business. Not just who is assigned a company truck, but who is allowed to drive their personal vehicles on company business. This “non-owned” exposure can create a significant risk for any organization. The liability exposure for anyone operating a vehicle on company business ultimately falls upon the company, and can create as much liability as owned vehicles. Each year, our office sees multiple claims over $1MM involving “non-owned” drivers, so it is critical to make this a part of any fleet safety/ risk management program.
Don’t be intimidated. The IRS promises a right to professional and courteous treatment as well as the right to appeal disagreements. Utilize those rights when it makes sense. For face-to-face audits, you can speak to the auditor’s manager if you don’t like the way the audit is being handled. After an audit concludes, you can still contest it with the IRS Office of Appeals and have the decision reviewed. If the appeals officer agrees with the auditor, you can go through the court system. 5. Not seeking expert help A qualified CPA can represent you before the IRS in a tax audit. This help is critical because you need someone on your side who knows not only tax laws but also IRS procedures. They’ll know how to present your case to both IRS Appeals and/or Tax Court. In addition, they could determine whether your penalties should be contested. When all else is said and done, a qualified CPA can help you negotiate payment of the tax bill, including applying for an installment agreement, and/or an offer in compromise, which allows you to settle your tax debt for less than the full amount. Take IRS audits seriously because the IRS certainly does. If you don’t take control of an audit from the beginning, you lose your power to file, contest, or appeal on your own terms. Steven Bankler has more than 42 years of experience in the accounting industry. Steven’s expertise lies in consulting, planning, tax, and asset protection as well as exit strategy services for closely held businesses. He also provides litigation support (both as a testifying expert witness and a consulting expert), business negotiations and estate planning. Visit www.bankler. com for additional tax strategy tips and to learn more about Steven Bankler, CPA, Ltd.
The other aspect of controlling who is driving on behalf of the company is to ensure there are clear rules for the use of vehicles by non-employees and for nonbusiness use. Insurance coverage follows the vehicle, so if a 16-year-old kid hops in the superintendent’s company truck over the weekend and has a serious auto accident injuring a third party, the company will be responsible and the commercial auto policy will respond. Clearly defined rules for utilization of company vehicles can help reduce this exposure. Once the list of individuals allowed to operate a vehicle on company business is identified, the next step is to determine the qualifications each driver must maintain in order to drive on company business. Failure to properly screen drivers will create potential “negligent entrustment” exposures for the organization and negative financial consequences should an individual with a poor driving history be involved in an accident. Most insurance companies use the guideline of no more than three moving violations or at fault accidents in the past three years and no more than two violations or accidents in the past year as their guideline for an “acceptable” drivers. In addition, there are single events which should result in the driver being excluded from any driving privileges such as a DUI, driving without a license, or vehicular homicide. We encourage our clients to not rely on the insurance company to manage their drivers. It is best for new hires to provide their own driving record during the interview process and check motor vehicle record checks annually for your own staff rather than have an insurance company tell you who can and can-
not drive for your organization. It is also a good risk management practice to require individuals to maintain personal insurance if they are driving on behalf of the company. These really need to be more that the state minimum limits of $30,000 per person, $60,000 per accident for bodily injury and $25,000 property damage, as they are not adequate to protect the individual or the company from a significant collision. Requiring a $300,000 combined single limit will help insulate the company’s auto policy and reduce the risk of the individual being personally responsible for damages beyond these state minimums (depending on the type of vehicle this might cost from $50-$100 per year for 10 times the coverage). The mileage reimbursement rates account for this level of insurance. Per the IRS mileage calculations, over 10% of the current .58 cent reimbursement rate is to pay for adequate insurance. Managing drivers and fleet safety should be an important part of any risk management program. It can take some time to develop policies and procedures specific to your operations and maintain the records for company car drivers, but this is time well spent in order to reduce potential liability exposures for the organization. Mr. Gaskamp is responsible for developing partnerships with clients to implement risk control strategies to reduce the organization’s overall cost of risk. He has over 25 years of insurance and risk management experience and is very active in the safety and risk management community. He is a national faculty member of the National Alliance Certified Risk Manager’s program and serves on the safety committees for the Association of Building Contractors, Association of General Contractors, Texas Aggregate, Concrete Association (TACA) and the American Society of Safety Professionals (ASSP) Construction Specialty Practice. He holds a Bachelor of Business Administration in Risk Management and Finance degree from the University of Texas at Austin. Mark can be reached at mark. gaskamp@marsh.com
Marsh Wortham, a division of Marsh USA Inc., was formed in 2018 upon the combination of Marsh and Wortham Insurance, and consists of Wortham offices in Texas and Marsh offices in Texas, Oklahoma, and Louisiana. Our parent company is Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy, and people. With 75,000 colleagues worldwide and annualized revenue approaching $17 billion, Marsh & McLennan Companies also include global leaders Guy Carpenter, Mercer, and Oliver Wyman.
